BY EVA CHENG
The world's automobile industry is headed for big trouble again. Having triggered each of the eight recessions in the United States since the second world war, the US auto industry is plagued once again by a crisis of overcapacity/overproduction — a gap between an increasingly powerful productive capacity and the industry's ability to sell its products.
Headed by General Motors (GM) and Ford Motor Corporation, all of the world's biggest automakers have extensive operations abroad in an effort to minimise production costs and enhance overseas sales. The sagging profitability of US auto manufacturers reflects problems in demand far beyond the shores of the United States.
A slowing US economy, the world's biggest market, is bound to make things worse, not only for the car industry, but especially for many key manufacturing industries — such as chemicals, pharmaceuticals, telecommunications, armaments, food beverages, tobacco, textile and clothing — all of which are also plagued by overcapacity.
Big Three in trouble
GM announced on February 22 that it will suspend production intermittently until June at 14 of its 29 production facilities in North America. Trying to soften the blow, a GM spokesperson claimed the corporation's production always goes "up and down" and stressed the shutdowns are only temporary to "balance production with inventories".
The stocks analysts, whose credibility and survival hinge on the quality of their advice to their clients, are far more to the point. Lehman Brothers' Nicholas Lobaccaro was quoted in the February 22 London Financial Times as saying that inventories of GM and Ford, the world's top two automakers, were at "alarming levels". He expected GM to cut production by as much as 20% in the second quarter of 2001.
GM refused to specify how many workers it would lay off except to reveal that the 14 affected plants employ 40,000 workers. But according to the company's web site, 21,900 of its workers will be laid off in the week of February 26 and its North American production for the week of February 12 was already down to 97,765 vehicles from 127,765 during the week of March 20 last year.
In November GM already laid idle 2200 workers at its Missouri commercial van plant for two weeks "to balance" its inventories. This coincided with similar moves by Ford and Chrysler in recent months.
Then on February 26, the now German-owned Chrysler Corporation — the US's third biggest automaker — became a lot more open about its problems. It revealed that after losing US$512 million in the third quarter of last year, it lost another $1.29 billion in the last quarter, with the expectation that it will lose US$2-2.5 billion this year. It aimed, however, to make a "small profit" next year, hoping to return to "full profit" only in 2003. (For all of 2000, Chrysler made a profit of US$470 million but it's a far cry from the US$5.2 billion it made in 1999).
These profit projections, however modest, weren't even based on improving sales. They are built on savage job cuts (26,000) and plant closures (six) which are key to Chrysler's aim to produce savings of US$16.9 billion over the next three years. In addition, production shifts in five other plants will be reduced and overall production will be cut by 15%. Chrysler also cut the "profit-sharing" component of its workers' remunerations to US$375 per head from US$8100 a year ago.
According to Chrysler, its cutbacks are not a reflection of its falling market share but of a shrinkage of the total US market for automobiles. Chrysler's management expects the total auto market in the US to contract by 10% in 2001 to roughly 16 million vehicles, which it also expects it to stay at until 2003. But according to the New Jersey-based research firm Autodata Corporation, the market share of the big three auto producers in the US did shrink, from 68.5% to an all-time low of 65.6%.
Meanwhile, their inventories have continued to rise. Compared to an industrial target of a 60-day spare supply, says Autodata, GM's supply rose to 102 days at the end of January from 89 a year ago, while Ford's rose to 98 days from 83 days over the same period. Chrysler's reduced marginally but was still at a high of 82 days. According to Bloomberg news on February 24, the "big three" plan to cut production by at least 17% during the first quarter of this year.
Problems elsewhere
Outside the US, while few auto manufacturers reported rosy results, some are in a messier state than others. Mitsubishi Motors, Japan's fourth biggest car maker, announced on February 26 that by 2003 it will slash its productive capacity by 20%, its production platforms by 50%, its material costs by 15% and its staff by 14% (or 9500 jobs). Of Mitsubishi's four plants in Japan, one will be closed, with the fate of its plants in Australia still in the balance, depending on whether the Australian government gives it adequate handouts.
DaimlerChrysler, the world's fifth biggest auto manufacturer which owns Chrysler and 34% of Mitsubishi, reported on February 26 a 49% decline of its 2000 operating profits to 5.2 billion euros (A$9 billion), warning its profits in 2001 would shrink further.
South Korea's Ssangyong Motor posted a loss for the ninth consecutive year in 2000 to the tune of 972 billion won (A$1.5 billion). At the end of last year, its debts were still at a hefty two trillion won despite having reduced by 425 billion won over the previous one year.
While already struggling at its US home base, Ford's market share in Europe shrank from 12% in 1994 to below 8% last year and a 1999 profit of US$50 million turned into a US$1.13 billion loss in 2000.
Similar to several other industries with serious overcapacity, the world automobile industry was the field of a big number of takeovers and "strategic alliances" over the last few years in a bid by automakers to increase their market dominance.
In addition to having a minority stake in Fuji Heavy Industries and 37.5% of Isuzu, GM acquired 20% control of Fiat in 2000. Ford bought Jaguar and Volvo while striking an alliance relationship with Mazda of Japan. Renault, of France, acquired 70% of South Korea's Samsung last year after having bought 37% of Japan's Nissan the year before. DaimlerChrysler, itself the result of Daimler-Benz's 1998 acquisition of Chrysler, bought 34% of Mitsubishi Motors last year and 10% of Hyundai of South Korea.
Partly as a result of such acquisitions, the auto industry is more centrally controlled than ever, with its top 10 producers accounting for 80% of world car production of 56.3 million vehicles in 1999 — up from 69% of 55 million units in 1996.
Due to increasing development costs, an ever higher level of economy of scale is crucial to the profitability of automakers. Japan's External Trade Organisation estimated last year that an automaker needs to produce four million vehicles a year to be viable.
In 1999, only the world's six top auto producers met that test. In 1999 GM produced 8.3 million cars, Ford 7.2 million, Toyota 5.4 million, Volkswagen 4.85 million, DaimlerChrysler 4.82 million and Renault 4.72 million. Fiat, PSA, Honda Motor and Hyundai Motor, the remainder of the world's top 10, each produced between 2-2.6 million vehicles a year in 1999.
Though the rise of some manufacturing industries in parts of Asia in the 1980s was widely hailed by capitalism's apologists as proof of the system's vitality, it was in fact utterly unwelcomed by their First World competitors. But Asia's own overcapacity problem finally exploded after its 1997 economic crisis. In 1999, Asian automakers were operating only at a fraction of their capacity: Thailand at 41%, Indonesia at 15%, South Korea at 49%, Malaysia at 46%, India at 35% and China at 66%.
A number of First World automakers have responded to the growing overcapacity in the world auto industry by buying out their Asian competitors. The latest hot deal is GM's bid to acquire South Korea's Daewoo Motors, which has been in receivership since 1998. To reduce Daewoo's "cost base", Daewoo's creditors revealed in January a plan to cut within weeks nearly 2800 jobs, or 22% of Daewoo's work force.
Refusing to accept their "fate", the Daewoo workers are resisting. Thousands of them led courageous occupations of Daewoo's plants, confronted the suppression of riot police, took their demands to the streets and actively appealed for international solidarity support.
Ford plans to close its plant in Dagenham, England, while GM announced plans to shut its London-area Luton facilities which will eliminate 2000 jobs. Outraged by GM's move, 30,000 GM workers across Europe staged a walkout on January 25 which was followed by pickets and one-day strike in Britain in February.
On February 27, however, GM announced that it will invest US$332 million to form a joint venture with Russian automaker AvtoVAZ to build small sports utility vehicles. In GM's assessment, eight countries will account for the bulk of the growth in auto sales in the next decade. Russia and China headed the list, followed by India, Poland, Brazil and Korea.