Does the reality of the recession mean that car manufacturers are going to have to rethink their entire business model?
Fiat Group CEO, Sergio Marchionne, certainly thinks so. Fiat has gone through, and emerged from, some grueling times over the past decade. It’s safe to say that Marchionne has been a pivotal figure in ensuring that the Italian industrial giant is back on its feet and profitable once again. As recently as the third quarter of 2008, Fiat reported a healthy margin, and believed that it could maintain profitability even if demand dropped by up to 20%. They had every reason to be optimistic at the time because no one could have predicted the global fallout of the US sub-prime crisis. Needless to say, not many manufacturers, Fiat included, are making money at the moment. It’s simply a case of survival, and stemming the red ink as much as possible.
Marchionne projects a new world order in the automotive space. In a recent interview with Automotive News, he called the current economic condition a failure of many systems the likes of which he’s never seen before. He says the industry has to completely reevaluate the way it estimates volumes and calculates returns, as he points to the lack of any reliable indicators in the current climate. The situation is so unprecedented that Fiat have put all their plans on hold for the moment, and Marchionne refuses to make projections for the 2009-10 financial year.
Similarly, Dr. Pawan Goenka, CEO of M&M’s automotive division, in a recent TV interview, said that all their future plans were based on a certain factor of growth – albeit conservative. In the current climate, those projections mean nothing and they’ll have to rethink their entire strategy. It’s safe to assume that it’s a similar case in every single boardroom of practically every car manufacturer across the globe. If you need proof of that, or more evidence that the current scenario is completely unparalleled, you need only look at Toyota – who’ve posted their first ever loss in 71 years.
The dynamics of manufacturing, and the specifics of the auto industry aside, it all goes back to the financial crisis and the lack of available credit for car buyers. Factor in poor consumer sentiment, and you have a recipe for disaster for the automotive industry. The banks may have been bailed out en mass, and the collective bailouts may have saved the world financial system from collapsing, but it hasn’t had the intended effect. Banks are still wary of their own survival, and are keeping the money as close to their chests as possible. Just to put it in perspective, the bailout money proposed by different governments including the US, EU and China is estimated to be enough to eliminate world hunger for almost a decade.
Nevertheless, it’s not a lost cause. There’s still a lot of money out there, it hasn’t miraculously dried up – well some of it has, but that’s another story. Cars like the one you see here may not be flying off the shelves in the anticipated numbers, but there’s still very much a demand for them worldwide – and growing in India. The credit markets need to improve, and people need to loosen their purse strings just a little. How long it’s going to take is anyone’s guess. In the meantime, here’s wishing you a Happy New Year – let’s hope for a prosperous 2009.
