Going, going, gone?

Comment

Well, looks like Washington has conspired to bail out the American car makers for about one-tenth of a model cycle, using a huge mountain of cash that would have taken hard-working folks with real jobs a fair old while to amass.

Down Under we're all wondering how long the cash teat will be able to supply the car industry to keep it alive, and how long before the ungrateful so-and-so starts screaming for more. Or will it spit the dummy and throw millions onto Welfare?

Welfare in the US may not be exactly like the dole in Australia. Even so, you'd think America's 44th President is going to have his hands full trying to keep his voters nominally in work rather than on the streets.

However the problem for GM, Ford and Chrysler (which still has a pulse at the time of writing, but this statement is only good for the next few hours) is not that bad. Consider the more fragile car brands around the world whose governments may not be so willing to splash the public's cash to keep their monoliths alive.

Perhaps they are content to see only the fittest survive, or have no interest in semi-nationalised car industries.

Some big names could be humbled. Some small names could go to the wall, and this time there won't be any big old rich uncle GM to pick them up for a song, or even pick over the bones of their nascent global operations (oi, Master Daewoo, you awake at the back there? I'm talking about you).

Just among the legions of GM brands alone there are enough walking wounded, ungrateful almost-dead brands to fill a coffee table book with their tales of woe. Saab, Saturn, Pontiac, Buick (Chinese Buick excepted), Vauxhall, GM of South America, Hummer, Cadillac [OK, we get the point -- Ed].

So the question is, who are the least fit and how can they survive and what effect will their crippling or demise have on the Australian car scene?

It is no fun trying to run a car when the importer has upped and left or evaporated up its own tailpipe.

So what if the smaller fry were beaten out of existence, if not globally then in Australia, would the deck collapse and take the bigger guys with them?

The fault lines in Australia possibly run deeper than other countries because our dealer bodies have been weakened by the strategic withdrawal of GMAC and GE Money, even allowing for the Federal Government's SVP magic.

So while UK dealers will be staring glumly at pristine showrooms unsullied by customers, in Australia the dealers may have ceased to be.

With images of fields of parked cars keeping the grass down around Sydney and Melbourne, the public will know the times are tough for car dealers, driving down sales further, even supposing these potential buyers have the wherewithal or the desire to invest in a new depreciating asset with wheels.

So let's get tough here.

Suppose you are running (a mainstream) brand we'll call Brand Z. You have 25 dealers in Australia. You struggle to sell around 200 new vehicles a month in good times. Your dealers will all be multi-franchises because no one's making money on fewer than ten new sales a month in the mainstream market.

Sales then dive 22 per cent in November and 11 per cent in December, despite the tumbling interest rate and hyped-up advertising and an industry wide festival-promoting product on TV and in the papers (and online, of course).

Sales decline. But how far can Brand Z sales decline from 200 a month? As a mass-market brand, Brand Z offers three or four different models, maybe a small car, medium car and a small SUV.  Brand Z is also at risk as it hails from a country other than Germany or Japan.

In times of crisis, people stick with what they know. Their appetite for experimentation declines. So a Japanese or German car is a safer bet, because in three year's time, someone will still want it. But for all others (Holden and Ford excepted), allowing sales to decline is the route to Skid Row.

Brand Z's dealer won't wait, either. They'll be queuing up to hand back their franchise because they'll fear it has no residual value. As multi-franchise operations, their remaining funds and headspace will be devoted to defending their most profitable brand activities -- traditionally the ones in which they have invested most heavily, both in cash and reputation.

Brand Z operations management won't have the cash needed for a long-drawn-out marketing campaign to bolster sales, because their revenues from sales are falling, or even if still static, still too small to allow for extra capital to inject. So Brand Z importers (or factory operations) turn to the parent car maker.

At this point the real or imagined scale of the Global Financial Meltdown becomes apparent.

Brand Z's head office too has been looking at its global operations, or those who could be its potential purchasers or asset strippers.

They're looking at the 200 cars a month sold in Australia, calculating it's about half an hour's production a month, and figuring maybe it isn't worth it, especially now the Aussie Dollar is so weak the return on the sale of cars to Australia is diminishing. The car manufacturer cannot pass on the full weight of the currency movement to the importer, because no importer could survive when currencies fluctuate so wildly.

In June '08, AU$1 bought US$0.97. Today only US$0.71. Euro and yen rates are similarly stressed. Brand Z can't buy cars at the actual exchange rate, because it sure can't hike its sticker price by 20 per cent, because its price advantage, being a newbie to Australia, a tiddler, or from a non-Germanic or Japanese homeland means it has to be cheaper to survive.

The result is the line under which unviable markets gets drawn moves ever higher up the list in the manufacturer's mind. It struggles to balance the cost of producing cars for these markets against turning down the wick on overall production. Building cars for stock is a mug's game. No one has forgotten the 65,000 Rover 75s parked on airfields across the UK in 2005.

Australian car operations that did not post record sales results for 2008 (or sold fewer than 5000 units) could be considered at risk. Curiously, Fiat Group brands are insulated from this group of slackers because the company is actually extremely profitable at present in Europe, and not at all exposed to the US (aside from Maserati and Ferrari, of course).

In Australia in 2008, Rolls-Royce delivered exactly the same number of new motor cars as in 2007: seventeen each year, in case you had to ask. Presumably they were ordered a long while ago.

It will take more than spontaneous $1000 handouts to the elderly and low-income families to keep the car industry rolling. The Australian industry has always been competitive, but cut-throat deals have a nasty habit of leaving folks bleeding, most likely the hapless buyer, who, having found a bargain, wonders why three months later the dealer's gone broke and the service at the dealership he does find for his Brand Z MegaEuroThrasher III is awful, and the waiting list for a slot in the workshop stretches out months.

Soon stocks of cars bought at June's favourable Forex rates will be gone. Like the anaesthetic wearing off after a trip to the dentist, prices will edge up just as the demand tails off, and pain is the result.

By Easter we'll know for sure who is leading and who is bleeding.