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Buying trends: It's all about the factories

By Jay Nagley, Redspy Automotive

The current Opel/Vauxhall crisis reflects the most fundamental single fact about the car business.

If you can run your factory at over 90% of capacity and sell what you make without big discounts, you will make a lot of money – the news that Jaguar Land Rover made an astonishing £440 million in the last three months alone shows just how much money can be made.

If plant capacity falls much below 80% and you have to give big discounts as well, you will lose a lot of money.

The car industry has massive fixed costs tied up in factories and staff and every percentage point of unused capacity causes big swings in profitability.

For example, in 2007 before the financial crisis, Ford was running nearly every factory flat out and was making around £100m per month in Europe.

Now the recession means Ford of Europe cannot run flat out, and is broadly breaking even.

Opel/Vauxhall went into the recession more or less breaking even, and is now – well, you know the rest.

This raises the question of why Opel/Vauxhall was the Italy of the car industry – running up big debts in the good years and hitting a crisis when the bad times came.

Again, a comparison with Ford is instructive. Ford closed lots of capacity 10 years ago (unfortunately much of it in the UK), to get supply and demand into balance.

Opel always seemed to think the next new model would boost demand and resisted cuts (indeed
it has invested heavily in more capacity in Eastern Europe since 1990).

Only when sales of the Vectra fell massively short of projections did it close the Luton car factory, but that was not nearly enough.

Its current capacity utilisation is thought to be around 70% - and it is not exactly unheard of for Vauxhall to be offering discounts on top.

Apart from the political problem of closing car factories, there is a reason why car manufacturers seem reluctant to face up to these problems.

Closing car factories is not only unpleasant, it is expensive in the short-term.

If you close a factory tomorrow, your losses will increase because of all the closure costs. The benefits will only come a few years down the line.

It takes a very long-termist management to agree to increase next year’s losses. If the company is a subsidiary of a foreign parent, the top management doesn’t see two or three years of terrible losses as a great way to further their careers.

Much better to kick the can down the road for the next boss to worry about. Eventually, of course the can hits a brick wall – and then the costs are truly horrendous.
 

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