Like Band-Aids on a skinned knee or a finger in the dyke, large scale mergers between automobile manufacturers is the latest methodology in the path toward salvation. It’s really only a matter of time until the perfect storm of confluences sinks car makers.
This isn’t something the economy looks forward to by the way. A robust auto manufacturing sector is vital to a healthy U.S. economy. Autos drive America forward by supporting a total of 9.9 million American jobs, or about 5.1 percent of private-sector employment, and account for roughly 3.5% of overall GDP.
While overall global vehicle sales are still inching up towards the 100 million mark, the question looms as to whether sales are at their pinnacle. The Fiat Chrysler and Peugeot proposed merger renews the auto axiom of bigger is better. Size is used to boost profits amid falling demand and the most expensive technology transition in years. The large picture sits like this. General Motors Co., Ford Motor Co. and Chrysler, which once ruled the auto world, have been retreating from or struggling in foreign markets for years, usurped by Toyota Motor Corp. and Volkswagen AG.
Unforeseen changes in fossil fuel use, technology, and a different millennial generation are all culprits in big auto’s demise. Addressing emissions, as well as Tesla and other electric manufacturers, have cost the conventional auto market a fortune to retool to an industry that has yet proved itself sustainable. The structural dimension that has been ushered in by the millennials has meant alternatives such as Uber and Lyft, as well as the societal notion of not needing a car. The young socialist masses are evolving away from ownership of transportation for both financial and environmental reasons.
To give you an example of the manufacturing decline, Fiat Chrysler’s factories in Europe ran at about 52% capacity last year, well below the European industry average of 73%, according to LMC Automotive, and before this year’s acceleration of the decline in global auto demand. This is a messy and tangled business where unions will fight ownership tooth and nail to keep factories open, as well as the ubiquitous trade fiascos. This punch and counter-punch scenario doesn’t even factor in any increase in the price of oil, which some estimate could double in the next several years to over $100 a barrel.
Oh, and one more thing. Interest rates. Should they rise substantially, those 8 year plus auto loans will be the next sub-prime bond debacle. Then it’s good night.
The proposition of increasing costs to keep up with technology will only make sense if it can be priced into the vehicles and then actually sold for a profit. Ford and Volkswagen are collaborating to ensure such profits will happen, utilizing a cooperative deal to develop self-driving car technology. Ford is also licensing Volkswagen’s electric-vehicle technology, and the two have plans for self-driving robo taxis.
In Asia, Japan is doing the same thing by increasing its ownership stakes in suppliers and other manufacturers. In August, Toyota said it would buy a 4.9% stake in Suzuki Motor Corp., its partner of three years, to help it expand in India and Africa, markets where Toyota has struggled to compete against low-price rivals. And earlier this month, Toyota said it would raise its stake in Subaru Corp. from 16.8% to over 20%.
Stay tuned to see which shoe falls first.