Negative mulitplier effects of a brutal outlook for carmakers

There seems to have been grim news from the car industry every day for the last week or so. Nissan and Jaguar are shedding jobs. 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 average 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 negative multiplier 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.

Can European companies hope to compete with manufacturers who are protected by their governments, if they are not allowed to receive subsidies to allow them to ride out the recession - or should they be allowed to fail, if they don’t have the finance and strategies in place to compete in this environment?