Auto industry bailouts: Red ink on green policies

Despite its relatively modest global contribution to jobs (around 10m employed, against the 10% of all jobs in the OECD countries represented by commerce, or upwards of 5% by construction), auto manufacturing has jumped to second place behind banking in the queue for government bailouts.

Partly, that’s due to effective lobbying by an industry that represents important clusters of employment in regions like Detroit, Lower Saxony or the UK’s West Midlands. Besides that, the spectre of the outright failure of companies like GM, Ford or Chrysler brings with it the horror of a domino effect, whereby the failure of supply chain companies and dealer networks would multiply manufacturer job losses – to the tune of 3 million in the US if the Detroit Three failed outright, according to the Michigan-based Center for Automotive Research.

GM and Chrysler are due to submit agreed restructuring plans to the US Treasury this month if they are to receive a second tranche of US$17.1bn of federal loan guarantees. They need it badly, with their US sales down 49% and 55% respectively in January. Once the US market returns to life, the Detroit manufacturers will emerge smaller (GM announced 10,000 job cuts this month), and the dwindling US tax base is likely to face further strain.

US$25.5bn in loan guarantee has been requested by the Motor & Equipment Manufacturers Association, and support has also been requested by ailing car rental companies. In aggregate, the US auto industry is already being offered US$59bn of loan guarantees (of which US$25bn is specifically for green technology investments), and if the suppliers get their slice, the total will rise to over $85bn.

Green car agenda

Before automakers asked for bailouts, governments had set them tougher-than-ever targets for emissions and fuel economy, and taxpayers’ funds had been allocated to help companies reach them. In the US, before the complete destruction of Detroit became a clear and present danger, US$25bn of guaranteed 4% loans was set aside by the Bush administration to help Detroit re-tool to reach a fleet average 35mpg (equivalent to 42mpg in imperial gallons) by 2020.

The EU also funded pump-primed green auto technology R&D on a much smaller scale to the US, insufficient to distort competition between the European majors – or to help them survive the massive losses of revenue and borrowing capacity that most of them are now suffering.

Scrappage

Before the crisis hit Europe, some EU member states funded old-car scrappage-linked sales incentives. A scrappage incentive gives a buyer of a new car a cash incentive to send their old car (in Germany, minimum nine years old and in current ownership for minimum one year) to be scrapped. UK has never instituted such schemes.

France and Germany are currently funding scrappage incentives worth €1,000-€2,500 to tempt in otherwise reluctant new car buyers, nominally on the debatable grounds that scrapping old cars brings a net environmental benefit. The British government is now considering such a scheme, while conscious that sales incentives would tend to subsidise imports rather than the UK’s mostly exported domestic car production.

The European Automobile Manufacturers Association is currently pressing for a uniform, pan-EU policy on scrappage incentives, effectively, to push all EU Member States to provide car sales incentives, which most do not.

Few would claim scrappage yields net environmental benefit, given the energy absorbed in vehicle manufacture, albeit the tailpipe noxious emissions of 10 year old cars are very much greater than their Euro 4 or Euro 5 counterparts.

Green talk

As vehicle sales collapsed in Q4 ‘08, the European Commission responded to a call from the European automotive industry association ACEA for €40 billion in low-interest loans to finance emissions reduction investments, by allocating €16 billion in economic stimulus funding from the European Investment Bank. The UK is now planning to tap £1.3bn of that for “lower carbon initiatives”, as part of a package of measures aimed at freeing up lending of more than £2bn for the automotive industry.

The elements of sector-specific support announced in late January also include UK-funded loans or loan guarantees to support up to £1bn of lending for non-EIB backed emissions reduction-linked projects, besides more cash for an existing £110m Technology Strategy Board programme to fund R&D into cleaner engines, lighter cars, plug-in hybrids and components for electric vehicles. Separately, electric car and infrastructure R&D funding of £250m was announced as an aside by UK Transport Secretary Geoff Hoon when he confirmed the government’s approval of a third runway for Heathrow airport.

The Italian government has promised Fiat €2bn, and the French government has just agreed to lend Renault and PSA Peugeot-Citroën €3 billion each at 6% over five years, provided they keep all their French plants open for the period. Renault made no mention of specific green investments in accepting the loan, though its CEO Carlos Ghosn (also current European Automobile Manufacturers Association president) said, when asking the EU for yet more cash for the European car industry on 10 February: “The automobile industry has lost none of its potential. It will come out of this crisis with products that are more environmentally friendly and better suited to the new economic conditions.”

The only case of a mainstream manufacturer tapping into public funds for specifically green projects is Renault’s alliance partner Nissan, which has just applied for a slice of the US federal green re-tooling fund to build electric cars in the States – cars it was going to build anyway, before the crisis hit. Aside from the first few plug-in hybrids and electric vehicles planned by mainstream carmakers before the crisis hit, only a few small start-ups and Chinese firms will launch new alternative-fuelled cars in 2010-11.

PSA Peugeot Citroën Group, which lost €343m in 2008, said its €3bn loan will be used in particular to develop “cleaner, more fuel efficient and more affordable vehicles”, but the group’s very survival without that cash would have been questionable.

Domestic problems, global companies

A further problem, faced by the UK government in particular, is the globalised structure of the auto industry. Of all the potential recipients of auto industry aid in the UK, not one of the majors is UK-owned. The target is domestic job protection, while the fight to attract and retain inward investment, which perpetuates structural overcapacity, continues.

Most of the emergency funding on offer to the auto industry has no strings attached that will advance the greening of mobility beyond existing legislation. Hopefully, the US and EU emissions and average fuel economy legislation already in place will be enough to push the automakers who survive the downturn (most likely, not all will) to tool up for a greener market.

Optimistically, the bailouts might just keep more people employed for longer than otherwise, slow down the migration of vehicle production capacity to low cost countries, and enable the ailing automakers to bring their on average greener new model plans to fruition rather than delay them as R&D budgets are cut.

By then, governments will be praying that the carmakers are standing on their own feet, but this year’s bailouts may well have prolonged the industry’s sickness – excess capacity. Thanks to the unwillingness of governments to switch off life support to their ailing domestic automakers, the economic upturn may find us with as many barely solvent companies as before, few of them with sufficient funds to manage any step-change in green technology.

Meanwhile, the environmental agenda is not likely to be advanced by a scrappage scheme like Germany’s, which makes no distinction between ‘gas guzzlers’ and ‘fuel sippers’. As Jos Dings of the green lobby’s Brussels-based umbrella organisation Transport & Environment put it on 12 February, “When politicians are faced with a crisis, they feel the need to rush to take some action. It is a recipe for long-term chaos, and it’s happening right now with Europe’s car industry.”


Key stats:

Employment: One job at a vehicle manufacturer ensures four more at suppliers and another five in related sectors and retail (ACEA).

Automotive job losses in North America in 2008: 0.5m (US Bureau of Labor Statistics).

CO2 emissions: On a global scale, passenger cars emit 5% of man-made CO2 (European Commission, IPCC). Within that global share, the European passenger car fleet accounts for 2% (ACEA).

Average UK market new-car CO2 has fallen 13.1% since 1997, to 164.9 g/km in 2007 (SMMT). By 2012, EU legislation requires a further fall to 130gkm.

Global Car Production (units)

2007 - 52,011,638
2008 - 52,077335
2009 (forecast) - 49,085,149

Source: IHS Global Insight, January 2009