Wednesday, 28 January 2009

Industry Structure – UK Autos – The (Cross-Border) National Car Initiative

investment-auto-motives attended the House of Lord's announcement yesterday to hear Lord Mandelson describe the efforts being undertaken to bolster the UK car industry at this time of desperate need.

The package appears to consist primarily of the extension of the previously announced Loan Guarantee Scheme beyond the banking sector to encompass UK automotive with £1.3bn made available directly from the European Investment Bank and a further £1bn provided by the UK government to cover the amount “not covered by the EIB” - which seems to suggest that the full request package was refused by the EIB. These figures Lord Mandleson highlighted were also bolstered by an additional/separate £100m made available for education and training (up from £65m), £15m allocated as part of the Economic Challenge package made available, and a £250m incentive sum to aid the industry's (transformational) Ultra-Low Carbon R&D efforts – the onus of this last initiative put on the shoulders of Regional Development Agencies (such as the Midlands and South Wales) to formulate a compelling technical development strategy. Lastly and importantly, the critical question of 'assisted liquidity' to allow the automotive companies' financing arms to in turn provide consumer credit was an issue to be addressed by Mervyn Davies; has a dual reporting remit to both the Business Secretary & Foreign Secretary.

Given Lord Mandleson's previous incarnation as EU Trade Commissioner, and his present appointment as part of Labour's increasingly pro-EU stance, it should not be surprising that the majority of the aid package announced is coming from Brussels. That in turn gives credibility to the notion that EU financial assistance should and can only be provided as part of a holistic Pan-European action that necessitates that objective rationality is applied to Europe's massive and often overtly over-competitive auto-industry, which in turn creates deflated prices, margins and corporate profits.

With the sorry state of the European car market and the now heavily deflated regional TIV, there is just cause indeed to re-assess the basic economics of the sector and ensure that a re-shaping of the industry via attuned lending policies promotes a leaner EU automotive landscape – from suppliers through to dealers – in the post 2010 re-bound.

Back to the UK, and after the Secretary of State's address, the Conservative Peer Lord Hunt (whilst welcoming the assistance package) was keen to question to what degree the monies are correlated to a robust long-term strategy?

Tory concerns were that the spending should not be used simply to maintain today's status quo: protecting jobs within effectively declining companies which are founded on out-dated business models. The Labour Peer replied that the monies were indeed to be used to create a new Green industrial platform by which the UK could once again take a lead on the global stage.

From a very quick consideration of the UK scene, investment-auto-motives believes that elements of the said monies will be proportioned toward the outcome & recommendations of the ongoing UK Automotive Industry Review. Particularly we suspect, sizable batches will be alloted toward 3 main areas:

1. Jaguar Land-Rover given the TATA-owned company's lack of hybrid and electric propulsion-sets (woefully behind the likes of Lexus, Mercedes, BMW and even mainstream market Ford Fusion/Milan & next generation Hyundai Sonata)
2. UK transplant operations of Japanese VMs (Toyota, Honda, Nissan) so as to migrate Japan's leading edge hybrid technology to British shores and enable UK supplier core-competence.
3. Create the conditions to assist the creation of a new manufacturing template for EVs and other ZEVs and ULEVs.

Relative to the question of 'pumping' liquidity back into the auto-financing system so as to re-create consumer demand, that basic assumption implicitly holds the possibility for a dangerous outcome. Here and now as a consequence of the downturn the evident rationale of responsible consumers – those who actually are risk-worthy and ensure re-payments – are far less likely to purchase a new vehicle, no matter how great the deal terms given their own feeling of income insecurity. Thus any available credit made (via the banks or directly) would attract the less able and possibly less scrupulous consumer.

We've already seen the lowering of credit-score barriers in the US so as to get the system moving again, but the UK will probably take a more pragmatic stance which means that the credit made available could well be kept in limbo, untapped by the low-risk buyers and unattainable by the high-risk consumers. Of course the other high-possibility is that demands of commerce and enterprise survival means that official lending terms will be 'massaged' to shift the metal out of the showrooms and put straight back into the hands of the high-risk buyer, which prompts the probability of default and so the contagion migrates back through the credit system, putting the automotive world into the 'bad books' of the banking sector and government.
Ultimately, the announcement itself was typical for its lack of detail, but that is only to be expected given the yet to be released outcome of the domestic review and the yet to be released demands of Brussel's alignment of the EU auto-sector.

At the end of the day, we seem to be seeing a co-alescence of thought from the very different characters of Mandleson & Marchionne representing policy & production interests. Both singing off the same hymn sheet regards the future rationalisation of EU autos, and the need to utilise EU and national funds to provide the much needed Green step-change. To do otherwise could well put Europe at a disadvantage, lagging a technically advanced Japan, an 'Obama super-charged' US and an ambitious China with aspirations to undertake a major export drive toward Europe by its own new realm of eco-vehicle makers.