Motor Apocalypse

Turn on the radio and flip through the major news dailies. I wonder if anyone has noticed that the big 2 luxury brands; BMW and Mercedes have been heavily (relative to the previous years) promoting its pre-owned models. BMW is going one step further as its pre-owned models promotion advertorial is done by the principal BMW Group Malaysia itself while Mercedes-Benz's promo is largely a dealer led effort. I am taking this as a sign of the rapidly tanking economy. I could be wrong, but I don't remember seeing so many sales promo ads by premium marques before this. This to me is an unusual pattern, one that could only be taken as a indication of how serious the car market is tanking.

Luxury marques have a more tricky task to do as they cannot offer discounts the way mainstream brands can as doing so could hurt their brand image and residual values of the existing vehicles. The common trick is to register brand new cars as company cars and then selling it off as a certified pre-owned model (fancy term for a used car) a few months later at a discounted price. That way the resale value of existing vehicles are protected and the local distributors can still meet their committed sales target. While this is a normal practise in many countries (some even offer leasing plans), the extensive effort to promote these pre-owned models is what caught my attention. In USA, some companies are already offering 0% interest financing to push metal off the showroom lot. BMW Credit too is extending the low interest financing packages to base models 3 and 5 series (previously only offered to higher end models).

We have yet to feel the full blown impact of the tanking global economy but it is only prudent to expect these negative effects to trickle down by next year. Already auto industry executives all over the world are commenting that the situation today is the worst in the post-World War 2 era. The industry is now facing unprecedented challenges from two fronts; the global financial crisis and the threat of rising fuel prices.

"If you adjust for population growth, this is probably the worst industry sales month in the post-World War II era. I'm always very optimistic by nature," said Mark LaNeve, GM's North American vice president of sales, "but in my 27 years I never saw a month like this." Sales levels were those of a "severe, severe recession," he said. "In September, the consumer was hanging in there with us, but by the time we got to October, he was done and finished."

The world's largest automaker, General Motors is already tethering on the brink of bankruptcy, with 25 million jobs at risk. GM's latest 3rd quarter financial books reveal that it lost USD2.5 billion. What's more troubling is that GM has warned that the company's finances could drop below the minimum liqiudity of USD 14 billion to continue operating, by the end of this year. After which if no fresh capital injection is provided the company could be forced to file for Chapter 11 bankruptcy. Ford meanwhile has warned it too could face a similar liquidity threat and run out of cash by middle of 2009.

Many are still unaware of the serious repurcations if the Big 3 American manufacturers in the world's largest auto market goes under. On the US domestic front, millions of blue collared workers will be out of job with little hope of being absorbed by other companies / industry given the state of the economy is in right now. Unemployment benefits and welfare payouts will ballon and the effects will be felt by everybody from Walmart to bank housing loan repayments. On a global scale, everyone from the parts / components supply chain will be affected - tires, glass, steel, metal stamping, interior plastics, automotive electronics, etc etc. Contractors / consultancy outsourcing engineering design, testing and validation will be hit as well. I know quite a significant number of engineering consultancy and design firms in Australia were affected when General Motors cancelled its global rear wheel drive architecture program.

It's not just the Americans are feeling the heat. Even the automotive Goliath Toyota is feeling the pain, largely due to the strengthening yen and the ill-timed investment on the Tundra truck and Sequoia SUV. Toyota has announced a 69% drop in its third quarterly earnings.


BMW and Daimler too will be shutting down plants in Germany at various points until the year ends. It is said that luxury brands are usually less affected by depressive economic outlook as their wealthy clientele are usually less affected. But there is always a certain point where even the luxury market will be affected, it's just that this point is higher for luxury brands than mainstream brands. And we have already reached that point now.

"The global auto industry is facing unprecedented challenges. The turbulence in the worldwide economy continues undermine consumer confidence and impact our business," Ford Motor Co. CEO Alan Mulally

"...to secure profits for fiscal years 2009 and 2010. This committee is working to reduce total costs and maximize revenues," Toyota Executive Vice President Mitsuo Kinoshita on the formation of the Emergency Profit Improvement Committee

"We assume that 2009 will be another difficult year full of challenges," BMW Group AG CEO Norbert Reithofer

"The situation is very challenging, we are living in extraordinary times," Daimler Chairman Dieter Zetsche

Then again, the night is the darkest before dawn. The current crisis threatens / offers (depending on how you see it) to remove all the current established status quo in the automotive industry. The automotive industry have an awful record of taking the necessary steps or having the conviction to make right decisions pertaining sustainability of the industry. Every other car industry executive that has come and gone before this have resisted efforts / strong lobby calls to improve safety, fuel economy and its green credentials. The system and culture that we have rewards CEOs who increase profits, not making hard decisions for the long term good. Why sacrifise your bonus on today's profit on something that will only benefit the next guy 5 or 10 years later? As a result, we had almost 2 decades of strong profileration on the popularity of crude, easy to built, high profit margin (margins are far thinner on compact minicars) but fuel guzzling and SUV and trucks. The current business model adopted by the industry has too much vested interested from car companies to move away from it. It will take external factors of a near financial apocalyptic scale for these huge lumbering dinosaurs to change. But in the same way Nintendo in the 90s lost ground to Sony Playstation when Nintendo stubbornly refused to change its magnetic cartridge based business model, and like Microsoft refusing to move away from its PC centric view of computing world to Google's web-based model, lumbering car giants will be soon find themselves out of business if they don't adapt fast.

American auto execs lobbied for tax breaks to the Bush administration to pass the absurb idea of offering tax breaks to large SUV buyers. Toyota joined the American auto companies to sue the US Federal government's CAFE legislation for mandatory increase in fuel economy across the board, call it bad karma or whatever, but they are now reaping the results of their effort. Honda however is in a slightly better position as most of its models are fuel efficient passenger cars. Even its SUVs and truck (Ridgeline) are of the lighter unibody chassis (but more costly) / passenger car based variants. But these are only small consolations as even Honda is not immune to the tanking car market.

97% of the automotive industry is dependent on fossil fuel. For all the brains and the minds that entered the industry over the pass 100 years of the auto manufacturing, you would expect some sort of real innovation to happen. But amazingly, we have hardly made any progress over the pass 100 years in terms of energy diversification on our transport energy needs. This is not a coincidence. Moore's Law applies to the semiconductor industry on transistor density on a piece of silicon wafer. Computers went from mechanical to digital in the span of 50 years. In genomics, we went from discovery of the DNA to mapping the entire human genome in less than 40 years. So why is there such a chronic lack of innovation in the auto industry? Sure we now have better safety, lower emission and fancier in-car entertainment, but by and large we are still running on the terribly ineffiecient internal combustion engine invented more than 100 years ago. I find it difficult to believe that the auto industry is singled out from the innovation path without any concerted effort to resist change.

I harbor some hopes than the current tide will turn the established power structure on its head and allow the newer generation of companies a window to enter the industry. Probably some small startup from India or China, with some fancy power control algorithm that can somehow boost battery performance tremendously. Already Bangalore-based Reva Electric Car Company (RECC) is enjoying Brisk sales in UK. Israeli startup Project Better Place is already making in-roads in Israel, Denmark, Norway and Australia by introducing to the world a totally new business model for the industry; one that is inspired by the telco / broadband internet industry in saturated markets of developed countries (car markets in all developed markets is just as saturated as well, relying heavily on replacement buyers compared to first time buyers in developing markets).

Th Big 3 American automakers are lobbying for a USD 25 billion emergency loan package to help them retool their plants to produce more fuel efficient vehicles. So far neither has President Bush nor President Elect Senator Barrack Obama made any decision on this. The choice is not an easy one, but surely Americans should not just sit by and see their tax dollars being used to rescue companies that were clearly messed up as a result of poor leadership. Of course I use the term tax dollars for argument sake as Federal Reserve can always "print and issue" more cash into the economy, only possible in USA but that's another story for another channel.

Shai Agassi from Project Better Place.


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