What's Ahead for the Global Auto Industry?

Over the course of just a few months, the profile of the U.S. automobile industry has changed in profound ways as GM and Chrysler, two of the Big Three American carmakers, have filed for bankruptcy. The most immediate, visible effects are likely to involve direct and indirect job losses as manufacturing plants are shut down and car-parts suppliers and other vendors go out of business.

Under a “best case” scenario--a relatively smooth and easy bankruptcy and emergence for the two industrial titans--the U.S. auto industry is likely to lose 60,000 jobs by the end of this year, growing to about 179,000 in 2010, according to a Center for Automotive Research study. The bankruptcies and their ripple effects also will shrink the U.S. economy by $3.4 billion in 2009, and by another $9.9 billion in 2010, according to the CAR study.

But the industry also will undergo other significant strategic and tactical changes, says Jagdish Sheth, chaired professor of marketing at Emory University’s Goizueta Business School and auto industry consultant whose works include The Rule of Three: Surviving and Thriving in Competitive Markets and The Self-Destructive Habits of Good Companies...And How to Break Them. In a recent interview with Knowledge@Emory, Sheth discusses the latest developments within the industry and the likely outcomes.

Knowledge@Emory: Your “Rule of Three” observes that in almost every mature industry, the natural competitive forces through shakeouts and mergers end up in three large companies as full line suppliers surrounded by many small niche companies. Until recently, the U.S. auto industry was dominated by GM, Ford Motor and Chrysler. With two of them filing for Chapter 11 bankruptcy, what happens to the Rule of Three?

Sheth: Nothing. The Rule of Three is still valid because the automotive industry, like many others, is no longer a domestic industry, but a global one. We have already seen this in the tire industry. At one time, the U.S. was dominated by Goodyear, Firestone, and B.F. Goodrich. In Europe, the big three were Michelin, Dunlop, and Pirelli. But today’s global tire market is dominated by Bridgestone (Japan), Michelin (Europe) and Goodyear (US). Something similar will happen in the auto market, and we will see three companies from different markets dominating the global auto industry, while others will operate in niche segments.

Knowledge@Emory: Which American companies will likely become global players?

Sheth: First, let us consider what is happening now. Chrysler is not just bankrupt, but is being sold to Fiat. It will get consolidated into a global play. So in the U.S., we are really talking about Ford and GM.

Knowledge@Emory: Which of these two American automakers is likely to dominate the global stage?

Sheth: Ford may be one of them, but only if it makes some strategic international mergers or acquisitions. Ford needs more of a global reach, and may have to merge with a European company; although now that the Nissan-Renault alliance is under strain, there might be a merger of Renault or Peugot with Ford.

If Ford cannot follow through with a significant merger or acquisition, then I think a European carmaker, perhaps Volkswagen, is likely to emerge as a global player; but only after it completes additional mergers such as the one with the owner of the Audi brand [in the 1960s].

Knowledge@Emory: Which carmaker will be the third major player?

Sheth: As things stand, Toyota will be the best candidate. It is already the dominant brand in Japan, which is a big market, and it is active in other Asian markets, such as China and India. Toyota is also entrenched in the United States and in Europe.

Knowledge@Emory: With two of the Big Three U.S. automakers effectively sidelined, will there be any competitive pressure on foreign automakers to maintain or expand their U.S. manufacturing operations?

Sheth: Importing a fully built vehicle is usually not very cost efficient. It means that millions of dollars sit idle as inventory is shipped to a destination, and then further delayed in warehousing and distribution. Instead, as car companies become increasingly globalized, they will find it more efficient to source components globally, while setting up localized assembly facilities. This is similar to the industrial model that PC makers already utilize. But to make this global model work, automakers must improve their supply chain management capabilities. Right now there are still too many delays and other inefficiencies.

Knowledge@Emory: Let’s go back to GM. If it emerges from bankruptcy as a much smaller company, does it still have any competitive advantage?

Sheth: Yes, but not as a carmaker. Instead, GM’s key assets are its capabilities. One of them is OnStar. Right now OnStar is known primarily for its roadside assistance communications, but it can be a key player as automobiles evolve through vehicle telematics, or the integration of sending, receiving and storing multimedia information (voice, data, video) through Internet connectivity. Eventually, vehicles will trade information with each other to reduce traffic accidents and congestion, and will serve as communication centers linking individuals to everything from their home security system to their kitchen appliances.

Knowledge@Emory: These are all innovative ideas, but the U.S. government effectively owns GM right now. Do you think the company can be nimble and responsive when it’s owned by politicians?

Sheth: First, I do not think the federal government wants to be involved in day-to-day management. Instead, I believe the government will act as an institutional investor, setting financial goals and governance targets that will encourage the company to get itself back on track. There is some evidence to suggest that is what happened in the banking bailout. The government initially provided huge sums of money to banks when it loaned money at high interest rates through the Troubled Asset Relief Program (TARP). But the governance requirements and interest rates were so onerous—intentionally so—that banks were incentivized to quickly take steps on their own to raise capital and pay back the TARP funds. Similarly, I think the federal government will quickly move to sell off its stake in GM, or orchestrate a merger or acquisition with a foreign or a private equity company.

Knowledge@Emory: What will increasing globalization mean to the dealership model?

Sheth: I have said before that there are too many dealers and that the traditional model—where state laws often protect dealers’ franchises—is not tenable. But this excess is now being rationalized by GM and Chrysler, which are using their respective bankruptcies to circumvent the state franchise protection laws.

I anticipate more superdealers to emerge, similar to American Nalley of Brunswick and Hennessey Auto Cos. in Georgia [and Reedman-Toll in Pennsylvania]. I also expect we’ll see more regional and national dealers like CarMax and AutoNation.

The automobile industry is changing significantly, and while the developments may cause some initial dislocation, the changes are necessary and will result in greater efficiencies in the long term.

From Knowledge@Emory

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The Conference Board Maintains That Global Growth Rates Are In Positive Territory

/PRNewswire/ -- The Conference Board reports yesterdaythat global output growth in 2009 will be slow but remains positive at 1.3% for 2009. As the G-20 gathers in London today, The Conference Board points at large discrepancies in the global economy this year, with advanced economies experiencing a strong contraction in output at -2.5% on average, and emerging economies pulling the world economy along at a reasonable pace of 5.0% on average.

"As projections of global growth have been slashed dramatically recently, we need to remain conscious of the huge uncertainties about how the decline in global trade affects the domestic sectors of emerging economies," says Bart van Ark, Vice President and Chief Economist of The Conference Board. "The internal dynamics of growth created by the millions of consumers in these countries, who have a job or are able to find a job, even in a slowing economy, will continue to generate positive growth." His analysis appears in StraightTalk, a newsletter designed exclusively for members of The Conference Board global business network.

MODEST RECOVERY IN THE U.S. REMAINS LIKELY

Real GDP in the United States is forecasted to fall by -5.9% on an annual rate during the first quarter of 2009, signaling a deep point in the recession. Some better numbers are beginning to emerge. The Conference Board Leading Economic Index and Consumer Confidence Index suggest that the recession will not intensify further. The decline in real consumer spending has leveled off a little. Retail sales, excluding cars and car parts, rose by .7% in February, and some turns in the measures of home sales and prices were also recorded. The Conference Board projects that growth in the second quarter will stay negative and will be very slow in the third quarter, as capital spending will remain low and inventories will not be depleted until year's end. Overall industrial production is also unlikely to move up before the fall. Even the recovery in the fourth quarter will be held back by these negative trends and increased unemployment, which is typically a lagging indicator.

The U.S. may see a contraction in real GDP of -2.6% in 2009 - the largest annual decline since 1946. Nominal output (the value of output that also reflects price change) may actually fall at more than 4%, as disinflation is much more likely in the short run than inflation.

RISK OF A "DOUBLE-DIP" RECESSION

Back-to-back recessions, as occurred between 1980 and 1982 when the economy endured a systemic crisis rather than a regular recessionary period, are a potential risk at this time. Recent increases in commodity prices, on the back of monetary easing and decline in the dollar, are leading to an increase in inflation expectations.

"If the United States experiences a too rapid recovery, there may be a risk of another recession in 2010," cautions Van Ark. "It may fuel expectations for a return to inflation, adding to the uncertainty concerning the pattern and path of economic recovery."

The likelihood of this happening is small as there are three substantial differences between the current crisis and that of the early 1980s: 1) Inflation was the concern then; now the possibility of deflation for the short and medium term is a greater threat. 2) The 1980s crisis was related to a structural transformation of the model of production in the U.S., moving from a manufacturing to a services economy; the current crisis was largely sparked by overleveraged balance sheets and global imbalances in consumption and savings. 3) This time we have massive governmental intervention intended to prevent economic activity from declining even further and stem the rise in unemployment.

LARGE DISCREPANCIES BETWEEN ADVANCED AND EMERGING ECONOMIES

The Conference Board argues that the divergence in growth performance between advanced and emerging economies will create a major challenge to rebalancing the world economy toward a more manageable global distribution of production, consumption and trade in goods and services.

The economies of commodity-producing countries - such as Russia and Brazil - have been producing bad results due to falling energy and commodity prices. China and India are the best bets to limit the global output collapse in 2009. China's export growth engine is under serious stress and the consumer sector will surely be affected by the decline in employment opportunities.

But the internal dynamics of growth created by the millions of consumers who still have a job or are able to find one in a slowing economy will continue to generate positive growth in China. Even though much of the U.S. $586 billion stimulus is likely to have already been baked into the government's investment plans, it may help keep China's growth rate at about 7.5% for 2009, says van Ark.

In India, as well as in several other large economies in the developing world that are somewhat less exposed to the global storm, the impact of the collapse in financial markets on fourth quarter GDP may have done a less lasting damage to the potential for growth this year.

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Georgia Tech Plays Key Role in Global Energy

Energy and sustainability experts at the Georgia Institute of Technology have taken a leadership role in the U.S. contribution to a 36-nation effort aimed at developing an international standard that would bring consistency to energy management systems worldwide.

The effort has implications for the public and private sectors alike, providing a process for managing energy use and implementing sustainable practices that would help hold down costs and minimize environmental impacts. This first-ever international energy management system standard – to be known as ISO 50001 – would also level the playing field for companies competing in the global marketplace.

With broad applicability across economic sectors, the standard could ultimately affect as much as 60 percent of the energy used in the world.

“Effective implementation of an energy management system standard often yields resource and cost savings, as well as risk avoidance,” explained Bill Meffert, manager of energy and sustainability services at Georgia Tech’s Enterprise Innovation Institute. “Reduction in the use of non-renewable fuels provides environmental benefits to the nation, improves security and leads to use of more sustainable sources of energy. Process and behavioral changes from targeted energy management projects frequently result in reduced raw materials usage, less waste generation and disposal, and lower air emissions.”

Beyond the direct benefits, adoption of ISO 50001 could also lead to long-term cultural changes that benefit organizations in other ways. “An energy management system standard establishes a culture of continual improvement to sustain the gains made, placing the organization in a position to realize even greater energy efficiencies and further savings,” Meffert added.

The U.S. Department of Energy is supporting the effort through a combination of active participation in the U.S. Technical Advisory Group (TAG) and through financial support for the administration of the U.S. TAG. The U.S. TAG is responsible for developing the U.S. consensus position on the proposed standard.

Rising energy prices have made managing energy a higher priority for industrial, commercial and governmental organizations worldwide. Beyond helping manage costs and controlling environmental impacts, large energy users may be driven to adopt the voluntary standards as evidence of their good corporate citizenship.

“Many countries around the world will use the standard as the basis for national programs that encourage large energy users to demonstrate their environmental stewardship,” Meffert said. “It is expected that national incentives – taxes, credits and similar vehicles – will be used to promote its use and adoption.”

Companies that adopt the new standard may also gain a public relations and marketing advantage.

“Companies that conform to an international energy management system standard will be publicly stating that they have adopted best practices for managing their energy supply and use, which helps make them competitive,” Meffert added. “They are also showing that they are managing their natural resources wisely. Many companies will also want to ensure that their suppliers and partners are environmentally responsible.”

In general, Meffert noted, standards are useful to helping organizations establish the order and consistency to manage key business components, whether they address quality, environmental protection or energy issues.

“By applying this standard, the organization uses the ‘Plan-Do-Check-Act’ steps of the continual improvement framework to manage energy resources, incorporating energy management into everyday business operations and strategies,” he said. “This framework encompasses both the management and the technical elements of energy management. The effective management of energy requires both to be present and integrated.”

While industry has driven development of the new standard, it could be used by any energy-consuming organization. The standard will define a management system for all energy sources – including electricity, liquid and solid fuels, renewable sources, steam, compressed air and chilled water.

The new ISO 50001 is being developed through a consensus process of the International Standards Organization (ISO) that involves representatives from national standards organizations in more than 36 countries who develop proposals, discuss issues, build consensus – and adopt the final standard.

The United States and Brazil are leading the overall effort under ISO’s framework. In addition to member nation representatives, two liaison members – the United Nations Industrial Development Organization and the World Energy Council – are also contributing to the effort.

The ISO/PC 242 committee established to develop the standard held its first meeting in Washington in early September, and will hold additional meetings on a regular basis. The goal is to have ISO 50001 ready for publication by the end of 2010, said Deann Desai, project manager with the Enterprise Innovation Institute who serves as secretary to the U.S. TAG.

“Excellent progress was made during the first meeting, and a working draft has already been developed,” she noted. “Among the issues discussed was the need to ensure compatibility between the new ISO 50001 and existing ISO management standards.”

Georgia Tech was heavily involved in developing the existing American National Standards Institute (ANSI) MSE 2000:2008 standard for energy management systems. That standard has seen limited adoption in the United States, but Meffert said globalization of commerce now requires an international standard that will be widely adopted.

“Many businesses today are multinationals that have facilities and/or trading partners overseas,” he explained. “When conducting business on a multinational basis, it is important that the competitive playing field be as even as possible – which is what standardization attempts to accomplish.”

Georgia Tech worked closely with the Department of Energy in activities leading up to the formal launch of the ISO 50001 development effort. Members of Georgia Tech’s energy and sustainability staff helped develop a comparison document that was used to facilitate initial international meetings, and they participated with ANSI in the process of producing an application to ISO explaining the need for the new standard.

Georgia Tech’s Enterprise Innovation Institute is administering the U.S. Technical Advisory Group (TAG) for ANSI. The group is composed of many energy management experts and helps shape the U.S. position for the international standard.

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J.D. Power and Associates Reports: U.S. New-Vehicle Retail Sales in 2008 Forecasted to Decrease by 2 Million Units Below 2007 Levels

J.D. Power and Associates Reports: U.S. New-Vehicle Retail Sales in 2008 Forecasted to Decrease by 2 Million Units Below 2007 Levels; Total Light Vehicle Forecast Revised Down to 13.6 Million Units for 2008, 13.2 Million Units for 2009

New Light-Vehicle Sales in Chinese, Indian and European Markets Also Anticipated to Slow Dramatically

/PRNewswire/ -- As the U.S. new-vehicle retail market continues to deteriorate, new-vehicle retail sales are projected to end 2008 at 10.8 million units, which is 2 million units below 2007 sales, according to J.D. Power and Associates.

Approximately two-thirds of the decline in retail sales -- which are reflective of actual consumer behavior in the new-vehicle marketplace -- can be attributed to consumers delaying vehicle purchases. On average, consumers are keeping their vehicles 4 months longer in 2008 compared with 2007 -- up from 67 months to 71 months. The remaining one-third of the volume decline comes from reduced leasing activity. Additionally, fleet sales are expected to decline to 2.8 million units in 2008, which is well below the 3.3 million unit level achieved in 2007.

"Buyers are both voluntarily and involuntarily exiting the U.S. new-vehicle market," said Jeff Schuster, executive director of automotive forecasting for J.D. Power and Associates. "The additional decline in expected vehicle sales is a function of growing concerns around availability of credit and leasing, declines in vehicle equity and general economic stress."

The current turmoil and financial crisis adds risk to the 2008 forecast of up to 200,000 units, as it is unclear how consumers will respond in the fourth quarter.

Total U.S. Light-Vehicle(1) Market

J.D. Power and Associates forecasts total new light-vehicle sales -- which includes both retail and fleet sales -- to drop to 13.6 million units in 2008, registering a 16 percent decline from 16.1 million units in 2007.

Market uncertainty has also led to a downward revision of the J.D. Power and Associates 2009 U.S. light-vehicle forecast. Total new light-vehicle sales are expected to drop to 13.2 million units in 2009, with the retail sales market declining to 10.6 million units.

"Falling trade-in equity, fewer leasing options, credit market restructuring and the increased migration to used vehicles are all putting added pressure on the U.S. new-vehicle sales market in 2009," said Schuster. "Any truly pronounced recovery appears to be more than 18 months away."

China Light-Vehicle Market

Slowing within China's automotive market is projected to intensify during the fourth quarter of 2008, and will likely lead to a downward revision for 2009. Despite the slowing, light-vehicle sales -- including passenger vehicle and light commercial vehicle segments -- in China are expected to reach 8.9 million units in 2008, which marks an increase of 9.7 percent from 2007. However, the projected growth rate for the China automotive market in 2008 is less than one-half of the 24.1 percent growth achieved in 2007.

Indian Light-Vehicle Market

The light-vehicle sales forecast has also been reduced for the India market, down 6 percent from the original forecast of 1.9 million units to 1.8 million units for 2008. The 5.1 percent growth rate forecasted for 2008 is considerably less than the increases demonstrated in 2007 (16%) and 2006 (21%).

European Light-Vehicle Market

Light-vehicle sales in Europe are expected to fall to 21.3 million units in 2008, marking a 3.1 percent decline from sales in 2007. Within Western Europe, sales are forecasted to decline to 15.6 million -- a decrease of 7.5 percent from 2007. While sales in Eastern Europe are expected to increase to 5.8 million in 2008 -- up 11.3 percent from 2007, growth within the region is slowing considerably.

"While the global automotive industry is clearly experiencing a slowdown in 2008, the global market in 2009 may experience an outright collapse," said Schuster. "While mature markets are being impacted more severely than emerging markets, no country or region is completely immune to the turmoil."

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UGA’s Center for Tropical and Emerging Global Diseases to Host Global Health Research Symposium

The University of Georgia’s Center for Tropical and Emerging Global Diseases will host an international research symposium, “Global Health through Research,” on Sept. 19 and 20 at the Georgia Center for Continuing Education Conference Center and Hotel on the UGA campus. The symposium will be held in conjunction with the 18th Annual Molecular Parasitology/Vector Biology Symposium.

To recognize and help celebrate the center’s tenth anniversary, symposium organizers planned the event as an expanded version of their traditional annual meeting. The program will feature ten of the world’s most prominent researchers who study human parasites and the insect vectors that spread them.

“This will be an exciting conference packed with cutting-edge presentations from the best investigators in the field,” said Boris Striepen, a symposium organizer. “We are also eager to present the outstanding work of UGA students and postdoctoral researchers to this highly accomplished audience.”

Scheduled speakers will discuss a wide range of scientific issues, including how parasites conquer their hosts, secure nutrients, and outwit the immune system to cause deadly diseases. Wielding sophisticated tools of molecular biology and genome science, these researchers work to reveal the parasites’ tricks and to develop urgently needed drugs and vaccines. Diseases to be discussed include malaria, sleeping sickness, leishmaniasis and several other diseases associated with AIDS.

The Center for Tropical and Emerging Global Diseases is a university-wide, interdisciplinary center established in 1998 to foster research, education and service related to tropical and emerging infectious diseases. Over the past decade CTEGD has grown into one of the nation’s preeminent institutes for tropical disease research. The center’s 18 members include faculty from eight UGA departments and four colleges. The center also benefits from the participation of adjunct faculty from the Centers for Disease Control and Prevention in Atlanta.

by Helen Fosgate
University of Georgia

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Governor Perdue Appoints Working Group to Study Education Policies and Practices to Make Georgia More Globally Competitive

Governor Sonny Perdue today announced the appointment of a working group tasked with investigating innovative ways to create long-term, comprehensive education reform to make Georgia more globally competitive. This working group, chaired by Dr. Charles Knapp and Dean Alford, will build off the work of the Investing in Educational Excellence (IE2) Task Force and review a provocative national report called Tough Choices or Tough Times to determine how Georgia might reform its education policies and practices to cause needed change for its educational system.

“I believe the experts serving on this group fully understand the urgency of the challenges we face in education in Georgia,” said Governor Perdue. “I am confident that they will create a blueprint for change that will facilitate higher achievement, thereby increasing Georgia’s economic competitiveness through our most valuable resource – our children.”

The working group will meet for the first time on July 17, 2008 from 10 a.m. to 2 p.m. in the Empire Room of the West Twin Tower in Atlanta to focus specifically on several areas of education policy reform:

· Moving students to postsecondary-level work as soon as they demonstrate the necessary ability;
· Enhancing the quality of preschool education opportunities;
· Improving P-12 teacher quality;
· Creating high performance school systems (in collaboration with the State Board of Education);
· Improving the academic performance of underachieving students;
· Further enhancing and supporting a world-class P-12 curriculum; and
· Ensuring the efficient use of the financial resources Georgia devotes to education.

Governor Perdue has charged the group to identify the policy changes that should be put into place quickly in order to make Georgia’s educational system more competitive in the next 15 years. He has asked them to work swiftly and submit recommendations to him in time for consideration for possible legislation in the 2009 session of the General Assembly.
Those chosen to serve on this working group include:

·Dr. Charles Knapp – (Co-Chair), Chair of the New Commission on the Skills of the American Workforce (which produced the Tough Choices or Tough Times report), President Emeritus of UGA, and Chairman of the East Lake Foundation
· Dean Alford – (Co-Chair), Chair of the IE2 task force, former state legislator, former State Board of Education member, current member of the Technical College System of Georgia Board, businessman
· Julia Bernath – Board Member, Fulton County Schools
· Veronica Biggins – Senior Partner , HNCL Executive and Board Search Firm
· Dr. Michael Bull – Superintendent, Glynn County Schools
· Representative Brooks Coleman – Chair, Georgia House Education Committee
· Tim Connell – President, Georgia Student Finance Commission
· Kathy Cox – State Superintendent of Schools
· Stephanie Laverne Haynes - Master Teacher/Academic Coach, Clifton Ridge Middle School, Jones County
· Kelly Henson – Executive Secretary, Georgia Professional Standards Commission
· Dr. Susan Herbst – Executive Vice-Chancellor, University System of Georgia
· Molly Howard - Principal, Jefferson County High School, 2007 National School Principal of the Year
· Ron Jackson – Commissioner, Technical College System of Georgia
· Representative Jan Jones – Chair, Georgia House Education Appropriations Sub-Committee
· Senator Dan Moody – Chair, Georgia Senate Education Appropriations Sub-Committee
· Jose Perez – State Board of Education member
· Jennifer Rippner Buck – Executive Director, Governor’s Office of Student Achievement
· Dr. Holly Robinson - Commissioner, Bright From the Start – Department of Early Care and Learning
· Dr. Ben Scafidi – Associate Professor of Economics, Georgia College and State University
· Ed Smith – Superintendent, Troup County Schools
· Carl Swearingen – Chair of the Technical College System of Georgia Board, businessman
· Senator Dan Weber – Chair, Georgia Senate Education Committee
· Alvin Wilbanks – Superintendent, Gwinnett County Schools