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Dr. Jim Leontiades
CIIM Business School
The financial crisis has brought with it many changes but none so strange or so far reaching as that taking place now within the global automobile industry.
The American automobile firms General Motors and Chrysler are both in trouble. The credit crisis which has affected housing and banking has also affected them. Credit has dried up. Consumer car purchases have plummeted. The government has intervened with a restructuring of the American automobile industry on an unprecedented scale. Chrysler which was once partnered with Europe’s most successful automobile company, Daimler Benz, is now to be partnered with Fiat, a company which has historically been among Europe’s less successful car companies. The first partnership failed. Will this be any better?
Needless to say, the Chrysler intervention goes against the often stated open market policies of the United States. No markets are truly “free” or “open” but those in the USA have tended more in that direction than most. In the Chrysler case the government is going far beyond anything attempted with the banks or indeed any industry intervention since the great depression. The government is virtually dictating Chrysler’s strategy, management, product policy, union relations as well as finance. Despite the statements of President Obama to the contrary, the American government is actively involved in managing the American automobile industry. It is a desperate move in desperate times.
Chrysler and the Government
Chrysler has been in trouble before. In the late 70’s the company was once again in financial difficulties. With the aid of the government it borrowed some 7 billion dollars which it paid back ahead of time, with a small profit. But this time is clearly different and the government’s role much more interventionist. Will it work? There is room for doubt. Is the government better able to plan the future of the automobile industry than those who have been closely associated with it for so many years? Perhaps Chrysler’s managers were too closely associated with it – not seeing the wood for the trees. Also the government is not starting with a blank piece of paper. It is bringing in its own experts. If it succeeds it will fundamentally change many perceptions about the future of the government business/ relationship in the United States and elsewhere. That is a big “if”.
Fiat’s contribution to this will be its small car technology rather than cash. This emphasis on small cars, perhaps reflecting the president’s priority on cleaner cars, is clearly what the government believes should characterize Chrysler’s future product policy. That is the logic behind the proposed partnership with Fiat. But are American consumers really interested in buying smaller cars? The answer to this question is closely related to the price of petrol. Fiat has historically specialized in small cars because petrol prices in Italy have been among the highest in Europe. Petrol prices in the United States have been on the low side of the global spectrum. Americans buy large cars because they can afford to operate them given the low price of petrol there. When oil recently shot up to 150$ per barrel and petrol prices in the USA reached unprecedented levels – American were quick to abandon their small trucks and SUV’s in favour of smaller cars. That seems to have shaped much of the governments thinking – but how stable is this small car preference?
New Automobile Technologies
Oil prices have subsequently subsided and petrol prices have declined. But with the credit crises and the drop in employment, consumers still hesitate to purchase the larger cars. How permanent is this? The economy will recover at some point. If the price of oil remains below 80-90$ a barrel, American consumers are likely to revert quickly to their old “large car” preferences, leaving Chrysler with small car technology that is irrelevant. Yes, there are expectations that at some unspecified date the price of oil will again reach triple digits – .but for Chrysler that may be too late. If the Fiat partnership goes through – it will only have a very few years (two or three) to achieve viability.
Quite apart from the price of oil, there is a real question as to whether small cars will dominate the American market. New technologies are bringing about petrol savings and cleaner emissions which are quite independent of the size of the vehicle. Hybrid cars, hydrogen powered vehicles, plug-in cars, fuel cells, these are some of the new technologies now being developed to save petrol and reduce emissions. Hybirds, of course, have been with us for some time and have already achieved a degree of success. Prototypes of the other petrol saving technologies are now emerging onto the market on a trial basis. These are the technologies which car experts expect to dominate the automobile market of the future. This would be unfortunate for Chrysler since Fiat has little to offer here.
On top of all this, Fiat is hoping to acquire General Motors’ plants in England, Sweden and Germany. If successful this would impose added cultural problems. Managing foreign work forces is an area in which the Italian company has had only limited experience. The German unions have already indicated their reservations.
