Thinking the unthinkable

Wednesday 25 March 2009

It’s only a few weeks since we were hearing about car factories being put on extended vacations and workers losing their jobs – but now it looks as if several well-known car makers could actually go out of business. So yes, things are going from bad to worse. Now as somebody who works at the sharp end of the motor trade, actually flogging cars to punters, I’ve already had plenty of experience of how chilly the economic winds have become. Dozens of dealerships have already closed, and many more are going to follow before things get better.

So don’t think that I’m trying to trivialize the crisis facing the industry when I suggest that losing a couple of manufacturers might actually be the best way out of this mess.

There really are no easy fixes for the state that the motor industry is in. At the moment it looks certain that governments are going to step in to try and save car factories based on their soil, and therefore the jobs of the workers in them, and we may even get to the truly daft situation where governments in different countries will be effectively ‘bidding’ with subsidies to decide where car production remains.

But why? The recession is pretty horrible at the moment, but it’s also an opportunity for capitalism to do its whole red-in-tooth-and-claw thing and to get rid of inefficient dealers, makers and parts manufacturers. Granted, if a manufacturer like Saab does go to the wall (which seems possible) that’s going to be a horrible process for the tens of thousands of people who work for the brand, from the guy screwing on door handles on the production line to the receptionist behind the desk at your local dealership.

But it would also take 100,000 mostly unwanted cars out of the European market and enable other manufacturers to better weather the storm by increasing production to match.

You could ask some similarly hard questions about why the British tax payer is having to dig deep to support the efforts of Land Rover to develop new models – like why weren’t these life-saving models being developed a few years ago, in time to make a difference to the company’s fortunes? For that matter, how is a manufacturer of hulking great off-roaders like Land Rover expected to integrate into the ‘low carbon’ future that everyone’s talking about? Wouldn’t it be kinder just to let the law of the jungle do its thing?

Because the motor industry’s problems are not, as its bosses would like to tell you, entirely caused by the recent economic collapse. For years its been clear that car makers produce more vehicles than we need or even want. In good times this excess metal has been sold thanks to a combination of cheap credit, enormous advertising budgets and fierce price competition between manufacturers. Competition so fierce that most car makers operate on profit margins thinner than the 5 percent or so that, pre-meltdown, they could have earned by liquidating themselves and putting the entire amount into a high street bank account. Look at it this way, in 1989 a basic Ford Escort cost £7500 and came with fewer toys that Christmas at Scrooge’s house. For that you’d get a gutless 1.3-litre engine, a four speed gearbox and a radio that wouldn’t even find FM stations. Oh, and if you were lucky the thing would last three years before it started rusting.

But because of inflation, £7500 in 1989 is worth about £14,000 in modern money – enough to buy you a Focus-sized car with aircon, six airbags, anti-lock brakes, stability control and a six speaker stereo that’s smart enough to talk to your iPod and anything up to a seven year warranty.

Big car makers have not become more generous over the last two decades. Instead it’s intense competition and this over-supply of new cars that’s forced them to offer more and more equipment, while being unable to charge (in real terms) no more than they could manage 20 years ago.

Obviously this has been great for consumers, and pretty good for the guys actually selling the cars and relying on showroom turnover to keep their bonuses topped up. But it’s been crippling for the motor industry, leading to the situation where manufacturers have started to literally run out of cash as the downturn bites. Of course, the industry has an answer to all this itself – the introduction of what’s known as a ‘scrappage’ scheme. This basically pays people to turn in unclean older cars to the crusher in return for a fat Government-funded cheque that they can put towards the purchase price of a new, super-clean motor.

On the surface it sounds like a reasonable idea, and in countries like Germany it’s managed to ease the worst effects of the downturn. And, with desperate times calling for desperate measures, you won’t find anyone trying to sell cars in the UK who will say a word against it, either.

Nobody but me, that is. Because I think it’s a terrible idea – artificially creating demand for yet more unnecessary new cars just to keep factories churning out metal and workers off the dole. It’s a cop-out, delaying dealing with the real problem – the fact we build more cars than we need.

Okay, I’ve been playing devil’s advocate here. But maybe desperate times do call for desperate measures.