The Auto Industry Restructuring Global Tour Moves To Europe

The restructuring of the American car business is still a work in progress. Chrysler laid people off as late as last month. The industry fired tens of thousands of people during 2008 and 2009. Toyota (NYSE:TM), considered by most the preeminent auto firm in the world, cut costs, people, and production capacity. It is hard to see how any more meat can be taken off the bone of the global car sector.

GM has decided that its European operations are much too large. It might have handled that overcapacity issue earlier and saved itself several billion dollars, but was too busy trying to save itself from liquidation. Now that the No.1 American car company has decided to keep Opel and Vauxhall instead of selling them with the financial support of the German government, GM has said that it will have to cut costs in the region by as much as 25%. That will likely mean 10,000 more auto workers will be out of jobs soon.

It is entirely possible that large car companies could move through another round of contraction next year. It is widely assumed today that auto sales will pick up in the US, EU, UK, and Japan in 2010, and that sales will stay strong in China, Africa, and South America. Rising unemployment could dash the hopes for better industry performance in the developed world. There is a minority of economists who believe that the Chinese economy will stagnate once the central government’s stimulus package is out of money and exports have not been rebuilt because there is little demand in the West.

The car industry is not unlike any other than has been forced through wrenching change by the recession. People believe that most those changes are over and that a turn in the global economy will give companies new profit leverage as revenues grows against shrunken cost bases. Those assumptions will seem optimistic if the recovery around the world does not pick up considerable speed in the first quarter of 2010.

The head of GM Europe, who may only be in the job temporarily, said at a recent news conference “We cannot let this situation linger; we need to get on with the restructuring.” That need for cost cutting is one that existed when GM assumed that the collapse of car sales was temporary, a period that might last only a year or two. That year or two is passing now. Auto companies and other large businesses in the manufacturing and financial sectors have been “lingering” at lower expense bases for the better part of 2009. And, fairly soon they will know if they can linger there any longer.

Douglas A. McIntyre