Why are the car companies cutting production?

This week Nissan became the latest car manufacturer to announce a scaling back of production in the face of falling demand for new vehicles. Nissan, which is 44%-owned by Renault SA, of France plans to halt production at its huge plant in Sunderland for a fortnight and shorten production runs on its main assembly lines for a further three weeks in the lead up to Christmas.

Although global sales for Nissan continue to rise - helped by fast-growing market demand in China, Russia and oil-exporting countries of the middle east, in Western Europe and North America there has been a slump in demand across the car range. Importantly for the Sunderland plant, demand for the smaller Micra and Note models has declined by more than twenty per cent. In 2007, over £40 billion was spent on new vehicles. The recession will see this figure decline in 2009 because of lower demand from personal and corporate customers.

Consumers have been hit by falling real disposable incomes, a reduction in the availability of credit and the rising cost of motoring. The situation is worse in the United States where Nissan sales have collapsed by more than 35 per cent over the last twelve months.

The reduction is short run supply is the classic response to a dip in demand. Nissan is anxious to avoid building up excessive inventories (stocks) which can be very costly for a business. Unsold stocks depreciate in value and often have to be sold at a discount. For Nissan, a temporary shut-down of production is preferable to making workers redundant which itself would involve lay-off costs.

Instead, no permanent contracted workers will lose their jobs and Nissan employees will attend training workshops during the two-week halt, and will be offered extra shifts at a later date to make up for the pay lost whilst the production lines are silent.

The car industry is one of those sectors that is likely to bear the brunt of the 2009 recession. A new car is a big ticket item of spending and thousands of motorists will probably delay their purchase of a new vehicle until macroeconomic conditions improve.

Nissan is not alone in contracting production. Honda plans to reduce out of it’s Civic model at its Swindon factory by 22,000 between December and March 2009. Jaguar is stopping production at Halewood, Merseyside, for a week at the end of October. And Ford has announced job losses at a factory in Southampton which manufactures transit vans.

As macroeconomic forecasts become gloomy the car industry is a good example of a sector that seems to be moving quickly to adjust supply in line with falling demand. The key will be the scale of job losses that result. In the near term the losers will be those workers on temporary contracts - whose employment is unlikely to be renewed until there is a recovery in sales.

Blog update 25th October

The Guardian reports that French cars group Peugeot Citroën is to impose immediate and “massive” production cuts after issuing a dire sales and profits warning.