A horror story
The auto industry across the Americas is in a horrible state. The restructuring of the US motor industry should, however, benefit Latin America, especially Mexico. In late May, Mexico hailed a new report from a consultancy, Alix Partners, which found that it was now 6% cheaper as a manufacturing location than China and 25% cheaper than the US.
The decision by Chrysler, a troubled US carmaker, to file for bankruptcy and idle its 23 factories in Mexico, the US and Canada, is likely to be the first instalment in a series of good news announcements for manufacturing in Mexico. Already, Chrysler has outraged US trade unions by announcing that it will shut eight plants in the US and shift a lot of production to cheaper sites in Mexico. Canada's government is investing in the Chrysler rescue in return for a commitment that none of the firm's plants in Canada will be closed. Mexico's auto industry may be looking forward to better times ahead, but it is currently going through the wringer, as are the region's other big auto-manufacturing locations, Brazil and Argentina.
Brazil's big motor industry has been underpinned by government tax breaks designed to encourage sales of new cars. It is worth noting that sales in Brazil were down just 0.7% year-on-year in the first four months of 2009, even though production was down 16.4%. Lower exports are the reason: exports fell 52% year-on-year in the first four months of 2009 in cash terms, to US$2.14bn.
It is also worth noting that Brazil's agricultural machinery industry is still doing OK. Sales in the first four months of 2009 were 5.4% down on the same period of 2008, but over the year to April 2009, sales were up by 22%, at 53,600 units. Another good harvest, and the industry should forge further ahead. The underlying strength of the Brazilian economy is beginning to come through strongly. Consumer demand is holding up: in the first four months of 2009, imports of light vehicles, mostly cars, rose 20% year-on-year to 134,585 units. Sales of domestically produced cars were down 3% year-on-year (to 731,765 units) in the same period.
In Argentina, the outlook for the industry looks bleak. In the first four months of 2009, vehicle output fell 39% year-on-year, to 108,796 units. Only Fiat, the ambitious Italian-based carmaker, has increased production in Argentina: it produced 13,283 units in the first four months of 2009, up strongly from 2,971 units in the first four months of 2008 to producing. In Argentina, both exports and domestic sales were down substantially in the first four months, at 39% and 35% year-on-year respectively.
The question in Argentina is whether the industry is viable at such a low rate of production. Already, components suppliers are in trouble, either selling up and closing or looking for alliances. Mahle, a German components company with a factory in Rosario, Santa Fe, wants to shift production to Brazil, but the Argentine government is trying to prevent this because the move would lead to the loss of 500 jobs at the plant. The bulk of Mahle's 12,000 employees in South America already work in Brazil, but the company has two other plants in Argentina.
Argentine car salesmen argue, however, that their glass is half-full, rather than half-empty. Daniel Alvarez, the president of the vehicle dealers' Asociación de Concesionarios (Acara), points out that this year will be the third best for sales in the country's history. He believes the country is on course for sales of 500,000 vehicles in 2009, after selling 194, 74 units in the first four months. The problem is that fewer and fewer of these vehicles will be domestically-built.
The Unión Industrial Argentina (UIA) reckons that the industry will shift between 450,000 and 500,000 vehicles this year. It points out that the Brazilian government has done more, and over a longer period, to support its auto industry. In Brazil, the government cut the tax on industrialised products (IPI), which reduced showroom prices by around 10%, from December 2008. In Argentina the government only started providing help in February 2009.
The Argentine government's effort centres on subsidising 80% of the financing of the cost of a new car. Despite this, domestic car sales are falling fast: in April sales dropped 29% year-on-year. This was the worst year-on-year fall to date this year. In January sales fell 14% year-on-year; in February they were down 15% and in March they declined 7%. The big problem for the industry is the collapse in sales of commercial vehicles. Sales of HGVs were down 61% in April, while sales of buses and vans also tanked. This suggests that businesses in Argentina are scaling back spending.
The problems in South America are, however, almost nothing compared to what is going on in the US. Chrysler, the US's third-largest vehicle manufacturer, filed for bankruptcy on 30 April. General Motors (GM), the US's biggest vehicle firm, is in the middle of negotiations with unions and shareholders over a major restructuring. Of the big three, only Ford has skirted a crisis.
On going bankrupt, Chrysler almost immediately announced that it would shut four of its US plants at Sterling Heights, Michigan; St. Louis, Missouri; Twinsburg, Ohio; and Kenosha, Wisconsin by the end of 2010. Production at these, and four other US plants, (Newark, Delaware; Conner Avenue, Detroit; North St. Louis and its axle plant in Detroit) will be shifted to Chrysler plants in Canada and Mexico. Some US trade unionists are outraged that not one Chrysler plant outside the US is shutting down.
It is worth recalling, however, that the US auto industry has been shedding jobs for years. In 2008 the auto manufacturing industry employed only 711,000 people in the US, down from 1.3m in 1999. In 2008 alone the industry shed 230,000 US jobs. The ratings agency Standard & Poor's reckons that even including component manufacturers, the US auto industry only accounts for just over 1% of US non-farm employment.
Outside Mexico, all of Chrysler's North American plants are temporarily closed during the bankruptcy process, a procedure the automaker hopes it will allow it to emerge, reorganised, within 60 days. The restructured company will likely be 20% owned by Fiat, with the United Autoworkers Union (UAW) taking a majority stake. Chrysler is the first bankruptcy filing by a major US automobile company since Studebaker in 1933.
In Mexico, where Chrysler is the fourth biggest vehicle maker (after Volkswagen, General Motors and Nissan), the company claims that its production will be more or less unaffected. In the first three months of 2009, its output (33,998 units) was 51% down on the first quarter of 2008. Overall, Mexico's automobile production was down 41% in the first quarter of 2009, at 291,800 units.
The overwhelming bulk of Chrysler's production in Mexico
is exported, mostly to the US. In the first quarter of 2009, it exported 31,578
vehicles. In 2008, Chrysler exported 253, 601 of the total 1.66m vehicles
exported by the whole Mexican motor industry. In 2008, Chrysler built 280,470
vehicles.
What is interesting is that Chrysler also sells large
numbers of vehicles inside Mexico. In 2008, its Mexican sales came to 116,137.
In the first quarter of 2009, local sales totalled 20,565.
Executives at Chrysler Mexico admit that the US plants
will bear the brunt of the restructuring. Chrysler has three major installations
in Mexico.
Chrysler's truck plant at Saltillo shut for a week on 27 April.
Its plant at Toluca, which builds the Dodge Journey, and its engine plant at
Ramos Arizpe have not closed. Fiat executives are assessing the Chrysler plant
in Toluca as a possible manufacturing centre for a new small vehicle to take
over from the PT Cruiser.
The engine plant at Ramos Arizpe is likely to be a
key element in any comeback by Chrysler. Harbour Consultants, a motor industry
management consultancy, claims that the Ramos Arizpe and Toluca plants are among
the most productive in North America.
What Fiat sees in Chrysler is its volume and distribution network in North America. Fiat's chief executive, Sergio Marchionne, reckons that in the future car makers will need to produce at least 1m vehicles a year from the same basic platform. Currently only VW does anything like that, from its Golf platform, which is also used by VW's subsidiaries: Skoda, Seat and Audi. The US government's plan to save Chrysler is unusual. Clearly, the administration had hoped that its plan for Chrysler would be a blue-print for the much more difficult rescue of GM.
Essentially the newly restructured Chrysler will be under the control of the UAW, in partnership with an Italian car maker, Fiat. The UAW has traded the US$10bn owed by the bankrupt Chrysler company to the retirees' health-care fund for almost worthless stock, instead of cash. In return, the union will own 55% of the company and get a seat on the board of directors. The UAW also agreed to cuts in supplemental unemployment benefits, suspension of cost-of-living pay increases, and limits on overtime pay. The UAW president, Ronald Gettelfinger, claimed that the rescue would end up as a partnership between the union, Chrysler, Fiat and the US Treasury. He noted that the 55% stake in the company would be held by the retiree trust fund, not the union.
Under the union's 2007 contract, Chrysler, as well as GM, shifted their responsibility for covering retirees' medical insurance onto a union-managed Voluntary Employees' Beneficiary Association (VEBA) trust fund.Gettelfinger said that this reduced the company's obligation to the retirees down to about 60% of what it was originally. The auto barons have succeeded in imposing new cuts since then. The recently approved agreement allows VEBA to begin “adjusting" workers' health-care benefits in 2010, two years sooner that the previous contract allowed. In addition, the union agreed to extend the deadline for company payments to the fund to 23 years.
The US government is bankrolling Chrysler's bankruptcy
expenses, providing more funds than the US$5bn bailout the company had
originally requested to avert bankruptcy. Chrysler has been given immediate
access to US$1.3bn in federal funds and once it “restructures", it receives
another US$4.7bn. About US$10bn in new government bailout funds will be given to
Chrysler through the bankruptcy process. VEBA, with about US$10bn in
liabilities, is receiving a US$4.6bn loan from the US Treasury, payable over 13
years at 9%.
When the company, allied with Fiat, emerges, the eight US
facilities which Fiat does not want, and their equipment, valued at US$2.3bn,
will auctioned off piecemeal.
GM: GM is also considering
shifting production out of the US to cheaper locations such as Mexico, China and
South Korea. Selling such a deal to the US government, which has awarded the
company US$15bn in aid, may be difficult.
GM estimates that a US car worker
costs US$54 an hour, while a South Korean costs US$22 and a Mexican US$10. A
Chinese autoworker, however, costs only US$3 an hour to employ. Auto-analysts
claim that GM's Mexican plants are better equipped than its plants in China, so
the company can produce a premium product there. Analysts said that the plants
most likely to close were producing those brands that consumers are spurning
such as Saturn, Pontiac, GMc, Buick and Hummer. Mexico produces very few of
these brands. GM has to produce a rescue plan that satisfies the US government
by 1 June.
Mexico overtakes China on costs
A
report by a management consultancy, Alix Partners, found that Mexico was now a
cheaper manufacturing location than China. This is a major turnaround from 2005,
when Mexico was more expensive than China. Now both India and Mexico have
overtaken China.
It is also worth noting that Alix Partners suggested that
the US is now only 6% more expensive than China. Mexico is 25% cheaper than the
US.
Stephen Maurer, from Alix, said that companies could no longer cut their
costs 30% simply by shifting production to China. The study covers a range of
products from small engines to moulded products. The study compared costs in
China, India, Brazil and Mexico with the US. It looked at labour costs, exchange
rates, transport and the cost of raw materials. Alix said that the fall in the
peso in the second half of 2008 had produced benefits for Mexico. Alix forecasts
that in the second half of 2009 China will benefit from lower freight costs, but
it concludes that this change will not be enough to tip Mexico from its perch.
Chile: Sales of new cars fell 51% to 41,144 units in the first four months of 2009, the Asociación Nacional Automotriz de Chile reported. In April, new vehicle sales totalled 11,684. The industry expects total new vehicle sales of around 130,000 units in 2009.