Financial Crisis -- The Joyride is Over

By Michael Condon

The credit crunch has put the brakes on Toyota’s golden run in Northern America.

Residing at the hearts of both the American and Japanese economic evolution stand the automotive industries. The Ford and the Toyota have long been the physical embodiments of these two powerful nations. Now, with the American Big Three teetering on collapse and the Japanese automakers pulling back their North American operations, the global financial crisis threatens to take some of its most symbolically significant scalps yet.

Automakers in the US and Japan are in for a tough few months.

It is going to be a tough time ahead for Detroit automakers, with General Motors (GM) saying that it may run out of cash by year-end and Ford saying it can only last a few months longer if a cash injection is not doled out by the US government. Chrysler is said to be in the weakest position—due to the fact that it is a privately held company, the exact state of its finances remains hard to know. However, it’s no secret that Cerebus Capital Management, which owns the company, has been seeking to offload it.

Not as bad as the US?
Back in Japan, things are not as dire. But with a bailout for the US automakers on the cards, Nissan’s Chief Operating Officer, Toshiyuki Shiga, has been saying there is a need for a financial support package from the Japanese government in order to make sure the playing field remains level. Toyota has already announced it will stop all North American output for two days in December. This follows the cancellation of the US production of slow-selling light trucks for three months this summer.

North American sales have slumped to their lowest levels since the 1980s. Carlos Ghosn, chief executive of Nissan and Renault SA, told CNBC that US industry-wide sales would fall to 11-11.5 million vehicles. This compares to 2007 rates, when sales totaled 16.15 million. According to various surveys, if an American automaker were forced to file for bankruptcy protection, 80 to 90 percent of customers would not buy its products. Cars are, apart from houses, the biggest single purchase a consumer will make, and so long-term parts and maintenance support is deemed extremely important. If there is the doubt that the automakers will not be able to deliver on warranties, consumers will go elsewhere. In a report by The Economist, David Cole of the Center of Automotive Research in the US, detailed a scenario where American automakers’ production dropped below 50 percent. Cole estimates that 2.5 million jobs would be lost in the first year. Over three years, the cost in transfer payments and lost taxes would exceed $100 billion over three years.

Gas guzzlers
But America’s carmakers have been struggling for some time. The US’s infamous gas guzzling culture seems to have blinded Detroit’s motoring fraternity to changes within the market. Only this year, GM unveiled the Volt, US’s answer to Toyota’s hugely successful hybrid, the Prius. Many have said the Volt will steal much of the Prius’ sales. But the car will not be available for at least another year, a long way away for a company that may not make it past the next few months. By comparison, the Prius is now fourth generation, first being sold in Japan in 1997. Hybrids are nothing new to Japan, having been on the market for over a decade.

During the 1980s, Americans turned more and more to SUVs, partly as a response to the government’s attempt to curb emissions from large gas-guzzling cars. Nissan and Toyota eventually joined the party with their own SUVs, with the Toyota 4Runner introduced in 1984.

For companies that were already in trouble and in need of new technology, the drying up of credit could not have come at a worse time for Detroit’s car manufacturers.

But the American automakers stuck to their traditional money earners at a time when consumer tastes were rapidly changing. Smaller and newer companies, such as Korea’s Kia Motors, experienced an increase in global sales of 12.7 percent in the first 10 months of 2008 compared with the same period for the previous year. The company has just opened a $130 million design center in California.

For companies that were already in trouble and in need of new technology, the drying up of credit could not have come at a worse time for Detroit’s car manufacturers.

Falling profit
In Japan, Nissan’s Shiga first told reporters that the company’s annual operating profit target would be 270 billion yen ($2.8 billion). That means the second-half profit would be about 78 billion yen—less than one-fifth of 2007’s 424 billion yen. But Ghosn later said profit would fall to “zero” as US sales dropped to the lowest annual tally in 15 years. The strength of the yen also worked to slice profits and Nissan’s US sales dropped 33 percent in October.

Even previously robust markets have been hit by the economic slowdown. Toyota anticipated sales of 2008 to be around 600,000 instead of 700,000, the official target. In Toyota’s most important market, the US, sales were down 12 percent for the year. Toyota built 1.29 million cars and light trucks in North America up until the end of October, down 7.2 percent from 1.39 million the previous year. In November, Toyota cut its production plans outside Japan by 7 percent to 4.07 million vehicles for the fiscal year ending March 2009. Although Toyota’s unofficial policy of leaving permanent workers on the payroll even while plants remain idle still stands, it is a different story for its temporary workers, with half of the 500-strong temporary workforce at its Georgetown plant already laid off.

After Toyota’s golden run over the last couple of years, the latest turn of events must be hard for the company’s executives to swallow. While the auto giant is not in the same position as its Detroit’s counterparts, it will be a lean couple of months for the company. Nissan is in an even worse position but Ghosn has gone on the record to say the carmaker will not seek any more alliances to ensure it survives the economic slowdown.

The North American market is predicted to come back strongly in 2010 or 2011 but for the American GM, Ford and Chrysler, that might as well be a century away.