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

-----
www.georgiafrontpage.com
Georgia Front Page
www.fayettefrontpage.com
Fayette Front Page
www.politicalpotluck.com
Political News You Can Use

Georgia Industrial Employment Declines Nearly 9% According to Manufacturers Directory

/PRNewswire/ -- Industrial employment in Georgia fell 8.8% over the past twelve months according to the 2010 Georgia Manufacturers Register, an industrial directory published annually by Manufacturers' News, Inc. (MNI) Evanston, IL. MNI reports Georgia lost 48,904 industrial jobs and 515 manufacturers between April 2008 and April 2009, the sharpest decline MNI has ever reported for the state.

According to earlier reports by MNI, Georgia suffered a 2.2% loss in manufacturing employment between 2006 and 2007, and a loss of 2.3% between 2007 and 2008.

Manufacturers' News reports Georgia is home to 10,893 manufacturers employing 507,866 workers.

"As with the entire nation, the recession continues to chip away at Georgia's core sectors. The faltering housing market has affected industries such as wood, furniture and building products, and has worsened an already suffering textile industry," says Tom Dubin, President of the Evanston, IL-based publishing company, which has been surveying industry since 1912.

Employment in the textiles/apparel sector saw the worst drop in employment, down 16.2%, or 13,219, and currently accounts for 68,562 industrial jobs. The loss is more than double what MNI had reported in previous years, with a 6% drop in textile employment recorded over the 2006-2007 survey period and a 7% percent decline over the 2007-2008 period. Textile/apparel companies shutting down include carpet manufacturer Shaw Industries, a Springs Global towel manufacturer in Griffin, and American Fibers and Yarns, which shuttered its plant in Bainbridge last year.

MNI reports food products manufacturing has replaced textiles/apparel as the state's top industrial sector, currently accounting for 69,560 of the state's jobs, down 2.7% or 1,903 jobs. Third-ranked industrial machinery and equipment accounts for 45,680 jobs, down 5.1% over the year, with employment expected to strengthen with the recently-announced relocation of ATM manufacturer NCR to Columbus.

Job losses were seen across all other sectors over the past twelve months and included rubber/plastics down 18.4%; printing/publishing down 16.8%; lumber/wood down 11.9%; stone/clay/glass down 9.6%; furniture/fixtures down 9.2%; fabricated metals down 7.2%; paper products down 6.4%; transportation equipment down 5.8%; electronics down 5.4%; and primary metals down 2.5%.

Manufacturers' News reports Northwest Georgia accounts for a majority of the state's decline, losing 10.6% of its manufacturing employment or 34,948 jobs. The region is currently home to 294,667 industrial workers. South Central Georgia lost 4,788 jobs over the year or 8.4% and currently accounts for 52,070 industrial jobs.

Southwest Georgia is currently home to 39,804 industrial jobs, down 6.9% over the past twelve months, while Northeast Georgia saw industrial employment decline 5.2% and accounts for 81,036 jobs.

Southeast Georgia lost the fewest jobs, down 4.2% or 1,780 jobs, and is currently home to 40,290 industrial workers.

MNI's city data shows Atlanta is the state's top city for manufacturing employment, home to 55,861 jobs, with employment down 11% over the year. MNI reports Atlanta ranks 18th among the nation's cities for number of manufacturing jobs and ranks 22nd nationally for number of manufacturers.

Second-ranked Dalton accounts for 25,446 jobs, with employment down 3.5% over the past twelve months. Alpharetta saw no significant change in manufacturing employment and currently accounts for 16,826 jobs, while Marietta is home to 16,580 jobs, down 2.5% over the year. Fifth-ranked Norcross is home to 14,388 jobs, down 9.3%, according to MNI.

-----
www.georgiafrontpage.com
Georgia Front Page
www.fayettefrontpage.com
Fayette Front Page

No “Real” Recovery Until Late 2010 says Georgia State University

No “real” recovery until late 2010; credit market volatility leads to slowdown in spending and increased corporate job losses says Georgia State University forecaster

The current volatility in the credit markets has spawned a weakened economic climate (including a recession) that will last through late 2010 and will ultimately change the definition of normal growth for the foreseeable future, according to Dr. Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State.

In his Forecast of the Nation, released today, Dhawan said that even though growth will technically turn positive in the third quarter of 2009, the economy will still experience a somewhat large number of job losses in the second half of next year. From mid-2009 to mid-2010, the economy will grow at an anemic rate of 1% improving slightly to 1.9% in the second half of 2010. But, the growth rate will remain far below its potential of 3%, and it will be 2011 before the economy experiences a “proper recovery”.

“This recession is much more severe than projected in our August report. So far, we have lost a million jobs and I expect we will lose two million more within the next 12 months,” said Dhawan who compares the severity of this recession to what we experienced in 2001.

“Each recession is unique but what’s different between the modern recessions and those that occurred in the 70s, 80s, and even 90s is the negative impact on corporate jobs. Unlike earlier recessions, the corporate job loss rate in 2001 was 4.8% or one-third of the total jobs lost which made for a very severe corporate recession,” he said. “This time around we’re looking at a corporate job loss rate of 5.6%, which will again make up one-third of the total job losses.”

The ongoing job losses combined with a dramatic fall in stock and home prices and the volatility in the credit market has put the squeeze on consumers who have responded by putting the brakes on spending.

“The decrease in consumption is the culprit for the subpar growth performance in my current forecast,” said Dhawan. “That’s why we’re seeing the Treasury’s Troubled Asset Relief Plan (TARP) – aka the bailout – morph into help for consumers.”

But despite the Treasury’s best efforts, Dhawan is cautious about future growth prospects beyond this recession.

“Growth will be subpar as the credit that greases the wheel of a modern economy will be in short supply for the near future. Will it ever climb back to old levels after 2010? I doubt it.”

Highlights from the Economic Forecasting Center's National Report:

Real GDP growth for 2008 will be 1.3%, decelerating sharply to a negative 1.3% in 2009. In 2010, real GDP will grow by a subpar 1.2%.
For 2008, consumption growth will average only 0.4%, decline by 1.1% in 2009, and then grow weakly by 1.0% in 2010.
The unemployment rate will rise sharply from its 5.7% average to 7.6% in 2009 and then rise further to 8.3% in 2010. During this recession the economy will lose a total of three million jobs.
Vehicle sales will drop from their 13.3 million pace in 2008 to only 11.2 million units in 2009. A modest recovery is expected in 2010 with projected sales of 13.5 million units.
After averaging $100 per barrel in 2008, oil prices will average only $54.2 per barrel in 2009 and then rise to $66.7 per barrel in 2010. For 2008, the inflation rate will average 4.2%, but is expected to moderate sharply to a 0.6% rate in 2009. In 2010, the inflation rate will be a somewhat higher 2.0%.

Georgia and Atlanta – Volatile Economic Climate Damages Georgia’s Job Growth

Georgia’s economic picture has gone from bad to worse as job losses mount, bankruptcy rates increase and home prices continue to depreciate. According to Dhawan, the prognosis for the coming year is just as bleak as weak corporate spending brings with it a flood of layoffs looming on the horizon before giving way to a tepid recovery in 2010.

In his Forecast of Georgia and Atlanta, also released today, Dhawan said that the intensity of the job losses over the last few months has been more severe than expected.

“Since our forecast in August, job growth has been substantially downgraded,” he said. “So far this year, we have lost almost 41,100 jobs and job losses are expected to continue at this heavy rate for the next quarter as we lose another 34,000 jobs. Thus, for the calendar year 2008, we will show a net loss of 75,100 jobs and another 72,000 jobs in 2009 making our total losses from the second quarter of 2008 to the end of 2009 170,000 jobs or 4.0% of the employment level.”
According to Dhawan, not even government jobs, which grew during the last recession and served as a cushion from the technology meltdown will help Georgia this time around as several government entities have announced layoff plans.

When will Georgia see better days?

"Given the expectations of a recession in the U.S. and increasing numbers of job losses and bankruptcy filings in Georgia, combined with the closing of GM and the merger of two of the state’s largest employers, Delta (with Northwest) and Wachovia (with Wells Fargo), we expect significant layoffs in the state,” he said. “As for recovery, we’ll have to wait until FY’11 when job growth finally turns positive though still far below its potential.”

Highlights from the Economic Forecasting Center’s Local Report:

For calendar year 2008, we anticipate 75,100 total job losses (25,800 premium jobs). In 2009, 48,500 job losses are expected in the first half of the year, followed by 23,600 job losses in the second half, making for 72,100 job losses (24,600 premium jobs losses). The recovery will be modest in 2010 when 27,800 jobs will be created (3,100 premium jobs).
Georgia’s unemployment rate will increase from its projected 6.0% rate in 2008 to 7.5% in 2009, and further to 8.0% in 2010. However, it will still be less than the national number.
Atlanta’s employment growth will remain negative for the remainder of 2008 for a total loss of 45,600 jobs (17,000 premium job losses). In calendar year 2009, we anticipate another 42,100 job losses (16,400 premium job losses). In 2010 recovery in the form of 17,200 jobs (1,900 premium jobs) is expected.
Atlanta’s total housing permits will plummet by in 2008 by 54.0% after a 34.6% decline in 2007. Permits will again decrease by 13.5% in 2009 before recovering mildly in 2010 (2.7% increase).

-----
www.georgiafrontpage.com
Georgia Front Page
www.fayettefrontpage.com
Fayette Front Page

News to Use in Fayetteville, Atlanta, Macon, Peachtree City and all of Georgia