Ripple effects of a brutal outlook for the car industry

The global lack of demand for new cars was brought home to my Business Studies pupils last week when we heard that our annual visit to the Jaguar car factory in the Midlands had to be cancelled due to an unscheduled plant shutdown for the second half of January.

Luckily, Jaguar tell me that they do now have a production schedule for February and March, which puts them in a better position than Honda. In November Honda said they would shut down production for February and March, and today said they will extend that to cover April and May as well. Clearly they are trying to minimise costs while they adapt their capacity utilisation to the needs of the market, and giving themselves some time to adjust strategy towards this market which is shrinking at 20% per year for 2008 and 2009.

Honda’s workers will get full pay until the end of March. Although negotiations are not yet complete, workers are likely to receive about 65% of their pay for the remaining two months of the shutdown, the company said. They will also owe the time back to Honda when the plant reopens, and I wonder how this will be implemented – will they work unpaid overtime to pay off their ‘debt’ to the company, perhaps? In an excellent 10-minute feature this morning covering the need for a rescue plan for the European car industry, the BBC Radio 4 ‘Today’ reporter said that there are 10,000 unsold Hondas parked at Southampton docks waiting for buyers, while vessels which supply the iron ore which should be in use as a raw material for the industry are ‘parked’ offshore – normally their use would cost $250,000 per day; at the moment you could hire one for just $3,000 a day. All the suppliers to the car industry are badly affected by these shutdowns in the UK car manufacturing industry, so that many other jobs in the areas around these car plants will be at risk as a result – it was suggested this evening that as many as 600 suppliers to could be affected by Honda’s plans, and there must be many other businesses relying on providing goods and services to those employees who will struggle to survive. Think about the external economies of scale that led these suppliers to set up close to the large-scale car factories, and how dependent those businesses are on the success of the UK car industry, and you can start to see the ripple effect through the local economy that follows a 4-month shut down of a major local employer.

There are no guarantees that all the main European carmakers will survive the economic downturn, according to the EU’s Industry Commissioner, Guenter Verheugen. The US government spent billions of dollars on a bail-out package for Chrysler and General Motors in December last year. After meeting fellow EU ministers in Brussels, Mr Verheugen said state aid rules to help governments bail out individual carmarkers would not be relaxed, although current rules allow states to provide assistance if the money was used for investment and restructuring, rather than “just to keep an operation or company running”. He did not, however, rule out increasing loans to carmakers from the European Investment Bank. But can the carmakers afford those loans, while they wait for their customers to start spending again?