AUTOMOTIVE INDUSTRY

Major Element of OEM Demand

The automotive sector is a major element of OEM demand for wire and cable. Electrical and electronic systems within a vehicle are linked together by cable in the form of a wiring harness. Cables are used in a variety of sizes, ranging from heavy gauge battery cables to very light conductors carrying electronic signals. Specifications for automotive cable also vary, with, for example, enhanced high temperature performance needed for cables used in engine compartments and special cables required for ABS brake sensors. The amount of cable used per vehicle varies widely, with less cable being used in more basic car models, especially those sold in emerging markets, and more cable being used in more complex models that have many additional features requiring electrical controls. Introduction of electric / hybrid vehicles, though not yet a major market, will also increase cable content. In total, CRU estimates that approximately 0.9 million tonnes of copper is used globally in vehicle wiring harnesses. At present virtually all auto cable uses copper conductor, though some companies are developing auto cable with aluminium conductors. In addition to the cable contained in the wiring harness, insulated wire is also used within vehicles in the form of magnet wire in motors and alternators.

Global Perspective

As a result of the financial crisis, the weak state of some of the main players in the automotive industry has regularly been front-page news in recent months. According to analysis of the automotive industry by KPMG International, »the situation is grim, and the outlook is even grimmer.« Though there has been some short-term volatility, the global auto industry has been through a period of sustained growth over the last 10 years, but the fall in sales during 2008 has been quite severe. Not only are the OEMs of the car industry suffering, but some of their key suppliers are in trouble, hit both by the fall in demand and shortage of finance. Sales of cars and other light vehicles have fallen in most markets, but especially in North America and Western Europe. During the first half of 2008 most markets for vehicles held up reasonably well, but there has been a much more substantial decline in the second half of the year. This downturn in 2008 has reversed the growth trend seen in most recent years. In 2007 global vehicle production, according to OICA statistics, increased by 5.7% over 2006 to reach 73.1 million. In the OICA analysis General Motors held its place in 2007 as the world’s largest producer of vehicles: 9.3 million in total, compared to Toyota with 8.5 million, but Toyota is the largest producers of cars.

Emerging Markets Also Slow Down

In view of the problems in the mature markets of Western Europe and the US, global players in the auto industry have been able to look for better performance from their operations in faster growing emerging markets, such as China, India, Brazil and Russia. From 2006 to 2007 vehicle production grew by more than 10% in several important emerging markets. In 2007 there was particularly high growth in China, with an increase in vehicle production by 22% to 8.9 million. Between 2003 and 2007 Chinese vehicle production has doubled. Before the end of 2008 it has, however, become clear that even in these markets there are signs of a slowdown in demand growth. In these countries car-makers had planned to continue to ramp up production, in an effort to keep pace with very strong growth in demand, but most such plans have been suspended as a result of the slowdown.

Inventory Overhang

As a result of slowing demand, many car-makers, especially those in North America and Western Europe, had already built up substantial inventories by mid-2008, since production had not been scaled back too severely at that point. With the further step-down in demand that became apparent in the second half of 2008, the inventory problem has become more acute: car companies are simply not selling enough cars and in some cases are at risk of running out of cash. The global credit crisis means that it has become increasingly difficult for car-makers to raise additional finance in the normal way through bank loans, so some major car-makers have been lobbying governments for assistance in the form of loans.

Restricted Credit Affects Distributors

Lack of credit is affecting not only the car manufacturers and their suppliers, but is also disrupting the car retail business. In many markets cars have traditionally been sold on extended credit terms to encourage consumers to commit to the purchase of a major item of expenditure. As a result of the global financial crisis, consumer demand is weaker because of lack of confidence, but even those consumers who might want to buy cars may not now be able to get credit for the purchase. Banks are scrutinising loan applications much more stringently, so only borrowers with a good credit history will be able to get loans. Those customers that have cash to make a purchase and do not need to take out a loan may choose not to buy a car now but prefer to wait, expecting that prices will fall further as car dealers offer higher discounts in an effort to shift unsold inventory. In addition to the problems caused by tightness of credit among end-customers, car dealer businesses are themselves finding it more difficult to obtain finance.

Plants Suspend Production

The main reaction to the downturn in the auto industry has been to reduce production by temporarily laying off workers, cutting back on overtime, extending holiday breaks and curtailing extra shifts. Some car-makers are fortunate in having flexible working schemes in place, so that working hours can be reduced at slack periods. Eventually, however, it may become necessary for the car producers to lay off part of the workforce permanently. Cut-backs in vehicle production have been reported in virtually all countries, and several companies that had expansion plans for 2009 have put planned investments on hold.

US Light Vehicle Sales Plummet

According to analysis of US light vehicle sales by Ward’s Automotive, comparing the period January to November 2008 with January to November 2007, the national total dropped from 14.7 million to 12.3 million, a decline of 16%. The largest light vehicle producer in the US is GM, which experienced a 22% decline in sales for this period, but Chrysler’s sales dropped by even more (28%) and Ford’s sales were down by 19%. The major Japanese and other foreign groups were not immune to the downturn, though in most cases they did not experience such large drops in sales as the Big Three US producers. Toyota has the highest level of sales in the US after GM, and its sales declined by 13% over this period from 2.4 million to 2.1 million, while Honda’s sales dropped by a relatively modest 5%. The greatest effect of the downturn in the US has been on sales of light trucks, down by 23% from 7.7 million to 5.9 million in the year-to-date, as the impact of higher fuel prices made its mark. Sales of cars in the year-to-date were also lower, down by 8.5% from 7.0 million to 6.4 million, but were less severely affected than were sales of light trucks. Sales of imported cars were least affected, down by 2.0% over the same period.

Production Cut-Backs in Europe

In Europe sales of light vehicles were down by 5% in the period January to September 2008, compared to the same period in 2007. But sales were 9% lower in September 2008 compared to September 2007, so the situation has been deteriorating during the year. In October 2008 the slow down was even more marked. The decline in vehicle sales in the second half of 2008 has been most obvious in the countries of Western Europe, especially in Spain, Ireland and the UK where the impact of the financial crisis has already had a major impact on property markets. The downturn in vehicle sales in France and Germany has been much less severe, though the auto industry in these countries has been affected by lower exports. As a result of the downturn, many car-makers in Europe have scaled back their production operations. For example, VW in Europe has introduced extended breaks at some of its factories, including Wolfsburg in Germany. GM has cut back production at most of its European plants and plans to discontinue the third shift at its Gliwice plant in Poland from the beginning of 2009. The major car-producers in Spain have also introduced temporary production shutdowns to reduce inventories of unsold cars. As a result of this slowdown in Europe, some producers of auto harnesses have also made cut-backs. Dräxlmaier, for example, has imposed periods of extended leave over December and January at its harness operations in Romania.

Mini Cars Up in Japan

In Japan the overall situation for the car industry in 2008 does not appear as bad as in North America, as sales in the Japanese domestic market for January to November 2008 reported by the JAMA (Japanese Automobile Manufacturers’ Association) were down by only 3% on the equivalent period in 2007. However, even though the year-to-date comparison shows only a modest reduction, the situation in the Japanese market has become much worse more recently. In November 2008 total sales of new cars in Japan were down by 19% on November 2007. The main impact of weaker demand in Japan has been on sales of standard-sized cars, down by 32% in November 2008, and on sales of small cars (down 24%). Sales of very small cars (»mini cars«) were actually 3% higher in November 2008 than in November 2007. Daihatsu’s Japanese sales of mini-cars are up by 9% in the 2008 year-to-date, but producers of larger cars have made cutbacks. Toyota, for example, has curtailed production of Lexus models. Sales into the domestic market account for only 40% of Japanese car production, so exports have been important in sustaining Japanese production in 2008. In the first 10 months of 2008 car exports from Japan have been strong, especially to markets in Asia and Europe, but exports to the North American market have weakened.

Korea: Lower Exports

The South Korean car industry is even more dependent than the Japanese industry on export markets, with around 70% of production being exported in 2008. In data reported by the KAMA (Korea’s equivalent of the JAMA) for the period January to October 2008 there has been only a slight drop in total vehicle production compared to the equivalent period in 2007. Though production in the third quarter of 2008 was down compared to 2007, in October 2008, contrary to the trend in many other countries, Korean production of vehicles recovered. There has been a significant drop in Korean production of larger passenger vehicles (MPVs), while production of smaller cars (e.g. Kia’s Morning/Picanto subcompact model) has been growing. Korea is not immune to the global slowdown and in November 2008 the situation changed for the worse: in that month vehicle production was 18% lower than in November 2007. Hyundai has talked in terms of »an industry collapse« and car-makers are seeking tax reductions to stimulate domestic demand for cars.

India and China Also Affected

In other Asian countries there has also been a slowdown in vehicle production, but these emerging markets have not been as badly hit as the more mature markets of Western Europe and North America. The Indian car market has actually continued to grow during 2008, but the level of growth has been lower than car-makers had anticipated earlier in the year. In India inventories held by car dealers have increased, and Maruti Suzuki has reacted by offering higher discounts to customers. Even in China the boom in sales of cars halted in the second half of 2008. Chinese production of vehicles peaked in March and April 2008, according to national statistics. Even though there has been some decline since then, production in recent months is broadly similar to the average level of production in 2007.

Brazil and Argentina

2008 has been a very strong year for the auto industry in Brazil. Data from ANFAVEA, the Brazilian association of vehicle manufacturers, show that light vehicle sales for January to October 2008 were up by 23% on the equivalent period in 2007. The strong showing of the Brazilian market has helped to support the performance of global car companies such as GM, which have had big problems in other, weaker markets. However, even in the Brazilian market there were indications of a slowdown during the later months of 2008. Brazilian light vehicle sales were 3% lower in October 2008 than in October 2007. The situation in Argentina is similar, as light vehicle production was up by 16% in year-to-date terms compared to January to October 2007, but there was a 4% drop in October 2008 compared to October 2007. As a result some vehicle plants in the region have begun to cut back production, for example GM at São Jose dos Campos.

Restructuring of the Auto Industry Begins

As a result of the growing crisis in the industry, some major car producers may have to dispose of some of their businesses or consider mergers. Ford has already cut its stake in Mazda and is considering the sale of Volvo, based in Sweden, in order to raise cash and strengthen the weakness of the group’s balance sheet. If, as seems likely, the current global crisis in the industry is prolonged, there is likely to be substantial restructuring. In the US industry analysts have suggested that mergers amongst the Big Three, e.g. between GM and Chrysler, may be necessary to produce a viable US car industry. Having already bailed out parts of the financial sector, the US government may not be keen to provide extensive financial support to the US car industry, but the alternative – closure of one or more of the Big Three, with a knock-on effect on suppliers of parts – may not be politically acceptable. Even a large-scale merger could imply widespread redundancies as rationalisation takes place. After several months of lobbying and political infighting, in December 2008 a proposal to extend US$14 billion government financial support in the form of loans to the US car industry failed to win the approval of the US Senate. President Bush has, however, suggested that financial assistance could be made available from the existing government bail-out fund, but it is not yet clear what conditions would be attached to such assistance.

Distressed Automotive Suppliers

Traditionally the car-makers have expected their suppliers to meet their requirements with ever higher levels of performance and with year-on-year cost reductions. Over the last few years suppliers have been squeezed between customer expectations of cost reductions and higher raw material price increases. Though cable-makers are most acutely aware of the impact of higher copper prices, there have been major rises in virtually all the raw materials used in building cars. Some car-makers have been particularly reluctant to accept any price increases from suppliers of parts, even when the impact of higher material costs has been clear (and outside the control of the supplier). However, this pressure could not be sustained indefinitely, as there is a real risk that key suppliers may go out of business. In some cases car-makers have moved to single sources of parts in an effort to force prices down: as suppliers struggle to cope with the impact of the current crisis, car-makers are exposed to the risk of losing their only source of supply. One of the most obvious examples is the relationship between General Motors and Delphi. Though Delphi was separated from GM ten years ago, GM has not been isolated from Delphi’s problems. During 2008 GM has had to provide additional financial support to Delphi, which has been in Chapter 11 bankruptcy protection since 2006, and attempts by Delphi to attract outside investors have so far been unsuccessful. Less critical businesses supplying parts may be allowed to fail. In Europe, for example, the UK arm of Wagon Automotive, a supplier of auto parts, went into administration in early December 2008, as it was unable to raise additional finance from its bankers.

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