Shrinking Global Auto Production Capacity — On the Balance Sheet and The Couch

The past 8 quarters have produced information and data which, if taken seriously, should foster perpetual new analysis of traditional economic thinking, financial markets, worldwide production and government policy. But while the world's PhDs in economics, finance and other academic disciplines are undoubtedly hard at work digesting, analyzing and theorizing over recent events, it unfortunately takes far longer for the policy implications of what we are learning to trickle down to corporate decision and government policy makers. This painfully slow brain strain, if you will, is perhaps nowhere more apparent than in manufacturing and the auto industry in particular.

According to today's WSJ, CSM Worlwide predicts that "the auto industry has enough capacity to make 85.9 million cars and light trucks a year -- about 30 million more than it is on track to sell this year, the equivalent of more than 120 assembly plants." And The Journal, goes on to state "It also means the industry is utilizing just 65% of its available production capacity. Global auto sales are expected to grow by 25 million vehicles over the next six years, but even with that increase, CSM predicts that industrywide capacity utilization will barely reach 85% by 2015." Mark Fulthorpe, director of European vehicle forecasts for CSM Worldwide is quoted saying this "should be an opportunity for rationalizing capacity and some of the brands going away [but] instead, we're rearranging the furniture here. No real big decisions are being taken."

And why are so many auto companies still "rearranging the furniture"? Largely because many of them would have been history by now was it not for government intervention and bail-outs. The Journal is spot on in reporting "Most governments are rarely willing to let auto companies go out of business, even ones that are barely competitive. They see car companies as a strategic piece of their manufacturing base and rush in to provide aid, allowing weaker companies to live on in order to save jobs." But perhaps this observation is overly kind in one respect. Governments could also "rush in", having been able to predict the downfall of large ineptly managed manufacturers, and provide re-training programs for their voter's rather than throwing good money (hopefully) after bad. Ironically, CSM Worlwide, in short sighted pandering to their customer base of auto manufacturers and suppliers, supported the federal "cash for clunkers" program saying "it may be the most efficient way to inject much-needed cash into the entire automotive value chain ..." according their web site.

The US is not the only government disabler in promoting auto capacity reality among manufacturers. The Journal describes the plight and "fates of Saab and Volvo, two Swedish auto makers that are in the process of being sold, respectively, by General Motors and Ford Motor ... Yet neither Saab nor Volvo is going away ... [nor] big enough to survive on their own ... With aid from the Swedish government, Saab was taken over by a financial firm, Koenigsegg Group, which in turn partnered with China's Beijing Automotive Industry Holdings [and] Ford is in talks to sell Volvo to another Chinese auto maker, Geely Holding Group."

The market disruption that occurs when companies are deemed too politically important to fail -- and know that they'll become wards of their respective countries should they be headed that way -- is an economic charade. Just as we have perpetual strategic and IT growth in the development of supplier visibility in procurement, so too do governments have the capacity and technology to see through their industrial manufacturing base and plan accordingly without unnecessarily impairing -- or worse yet destroying -- the efficiency of the marketplace.

William Busch

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