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Time for that long road trip

india Updated: Jan 05, 2009 21:28 IST
N. Chandra Mohan
N. Chandra Mohan
Hindustan Times
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The travails of the automobile industry are emblematic of the deepening global economic crisis. While the focus of attention is on the bailout of the American Big Three (General Motors, Ford and Chrysler), similar requests are being made across the world. South Korea’s Ssangyong Motor has sought assistance from the government to stave off bankruptcy. The Chinese and Indian auto industries, faced with declining demand, seek support. Europe’s leading automakers have also lined up for handouts, including refinancing help.

The global industry is idling for several reasons. Thanks to the sharp spike in gas prices last year, Americans now prefer hybrids and smaller, more fuel-efficient cars. One in five US sales, of late, has been of a fuel-efficient compact or subcompact as against one in eight a decade ago. Sales of gas-guzzling sports utility vehicles have plummeted, and lower gas prices now haven’t helped either, as consumers do not want such vehicles. The Big Three are also bleeding from legacy pension and healthcare costs.

The sales slowdown that hit the world’s largest auto market engulfed even the world’s largest carmaker, Toyota Motor, which is expected to register the first operational loss in its 71-year history! Other majors like Honda and Nissan, too, are slowing down their American production and postponing expansion plans. Toyota, in 2006, had built up capacity to cater to the US heavy pick-up market that crashed one and a half years later. Elsewhere in the world, auto companies are buffeted by recession and drying up of loan financing.

What sort of future lies ahead for the auto industry? Difficult to say, but further consolidation is inevitable as has happened throughout its 113-year history. Consolidation is capitalism’s purgatory. A number of bankruptcies in a crisis-ridden industry are inevitable. The larger and more successful units will absorb these firms. As the auto industry weathers the international crisis, only six carmakers are expected to survive the carnage with capacities to build more than 5.5 million vehicles per year.

“By the time we finish with this in the next 24 months, as far as mass-producers are concerned, we’re going to end up with one American house, one German of size, one French-Japanese, maybe with an extension in the US, one in Japan, one in China and one potential European player,” predicted Fiat Group CEO Sergio Marchionne. At present, only Toyota, General Motors, Volkswagen, Ford and Renault-Nissan have those capacities to remain viable. But who will be the sixth carmaker from China?

Equally inevitable is that the auto industry will reorient itself to make cars for markets that drive global growth. Around 53 million cars are produced worldwide. Vehicle production is declining in the US and has matured in Western Europe and Japan. The bulk of the increase of 11.8 million units in production between 2000 and 2007, in fact, took place in Asian countries like China and India, according to the International Organisation of Motor Vehicle Manufacturers. This is the prospect over the next 10 years as well.

India is fast becoming a global hub for small car manufacture. Notwithstanding the current slump in vehicle demand, car sales are expected to cross 2 million in 2010. Small compact cars make up more than two-thirds of this market. Global auto majors, including the six survivors, are acutely aware of this reality and have fast-forwarded their plans to make a greater number of such vehicles for the domestic market. This is indeed where the real volumes lie, to justify their significant foreign direct investments in the country.

Elsewhere in the emerging world, too, vehicle demand is still brisker than in the more mature markets. For all its current troubles, China is still ahead of all these developing countries in terms of sheer volume growth. Brazil and Russia are not too far behind. For the first time ever, car sales in these BRIC economies of 14 million are likely to overtake those in America this year, according to the Economist. Over the next five years, China is expected to have 20 per cent of the world’s assembly capacity for passenger cars. These trends have profound implications for the global auto industry. With Chinese and Indian industries accounting for most of tomorrow’s extra production, the surviving six carmakers have to cater to these markets to remain relevant. They have to tailor their strategies for the other BRIC economies as well. Brazil’s market needs flex-fuel engines that run on petrol and ethanol. Russians like SUVs. Above all, they have also to meet the changing requirements of customers back home for smaller and greener cars.

The industry in India and China also faces the challenge of leapfrogging to make clean cars of the future. More roads and highways are needed as half of the traffic runs on 2 per cent of the country’s roads. India must seize the opportunity of the current crisis to become a more integral element of the international division of labour in the global auto industry: carry out subcontract assembly operations, supply spare parts and components to original equipment manufacturers and export more small cars to the world market.