The end of the Swedish Car Industry?

This blog has followed recent events in the car industry closely, with an eye to the long-run viability of car manufacturing in mature economies. The last week has seen massive changes affecting Saab and Volvo, Sweden's two biggest car manufacturers.

Last Friday the majority US government owned GM, the owners of Saab, which is trying to restructure itself as a precursor to an IPO, announced that it was unable to find a buyer for Saab and would wind the company down. Saab, which stands for Svenksa Aeroplane Aktie Bolag, which actually means Swedish Airplane Corporation was established in 1938 as an aircraft manufacturer to build planes for the Royal Swedish Air Force. After 1945 the company diversified into car production, focussing on affordable cars, eventually selling its car subsidiary to GM in 2000. GM had owned a 50% stake in Saab's car subsidiary since 1991; however this investment has turned out to be a very poor one as Saab cars have failed to make a profit since 2001. Now Sweden's government have rightly refused to bail out Saab, although attempts are continuing to sell the company to a performance car maker, Spyker of the Netherlands. Such a sale would however probably mean the end of Saab as a volume manufacturer.

Over at Volvo, established in 1927 as a spin-off company from the ball bearing manufacturer SKF the future of the company as a volume manufacturer in Sweden also looks dubious. Volvo was purchased from the rest of the Volvo group, which continues to make commercial vehicles and construction equipment, by the Ford Motor Company in 1999. Volvo had continued to be a strongly independent subsidiary within Ford, continuing to specialise in safety and engineering innovations in-house. However Volvo's continued reputation, particularly for making high end family cars has not been sufficient to sustain its position in the western market, with sales falling 18.3% in 2008. Ford, itself struggling with the downturn, has now decided to sell on Volvo to Geely, a Chinese manufacturer. While Geely may choose to keep Research and Development in Sweden, with production costs, particularly wages, being very high in Sweden it seems unlikely to keep Volvo manufacture in Sweden for long.

No doubt some manufacturing will continue in Sweden for the European market, but as Volvo production is increased at lower cost for the Chinese market for how long can this be expected to continue? Or could Volvo be a rare case in which the country where the product is made counts, given Sweden's general reputation as a country which manufactures quality products? Not if the case of furniture retailer IKEA, a company which for many consumers embodies Swedish design and quality, is taken into account; it has successfully sold 'Swedish' furniture made in China, among others, for many years now.

GM execute an international U-turn

On September 24th this blog commented on the viability of the volume car industry in mature economies, using the UK as a case study to argue that the industry has generally only been sustained by government intervention of some sort. Today an international row has opened up between at least five countries over state intervention in the car industry. The US company General Motors (GM), featured in Alfred D. Chandler's 1962 book Strategy and Structure as an example of a successful multi-divisional corporation, was forced into bankruptcy earlier this year. The US government provided US$60bn of new financing for the firm; a new GM company was registered to purchase the operations and trademarks of the old. Presently the US government owns 61% of the new company, while Canada owns 12% of the equity. Effectively this makes the company a US State Owned Enterprise (SOE), although the US Government claims not to be involving itself in the day to day management of the company.

As mentioned on Sept 24th GM was close to selling its European subsidiary Opel, which also includes the UK brand name Vauxhall, to the Canadian car parts manufacturer Magna. Today GM announced that it had reversed the decision to sell Opel to Magna, and would instead be pressing ahead with 10,000 redundancies in Europe, from a workforce of 55,000. This decision was motivated by a wish to remain within the European market, which GM says is starting to improve. GM are also thought not to want to miss out on expansion in the growing Russian market, a motive perhaps driven by the US Government's wish to float GM on the stock exchange as soon as possible. It will be easier to do this if GM has strong growth prospects. Meanwhile the German government and car unions are unhappy with GM's decision as they had negotiated a guarantee from Magna not to close any German factories. The German government is now also demanding the return of a €1.5bn bridging loan made to Opel to keep it going while the sale was negotiating, while the IG Metall union has announced a series of walk-outs in protest. Meanwhile in the UK the government and trade unions welcomed the news as it meant that factory closures in the UK now seem less likely. Even the Russians are in the mix - their state owned Sberbank had provided capital for the Magna takeover, and Russian Prime Minister Vladimir Putin announced that the Sberbank-Magna consortium would 'carry out a deep legal analysis of the situation' with GM.

Why then are all these governments fighting for their share of influence over GM? The US, Canada, Germany, and the UK can all be considered to have mature economies, while Russia's economy perhaps presents the main growth opportunity for the car manufacturing industry. It appears that the western governments were again acting to try to halt the long term decline of car manufacturing in their particular jurisdictions. Yet it surely seems likely that while government intervention may prolong the decline of the industry, as previously argued emerging economies like Russia are likely to be in a position to maintain production most economically in future. To complicate matters we now have an SOE in the unusual position of operating across borders, although as with other SOEs that operate across borders such as Électricité de France or Deutsche Bahn, it is unclear why the firm should be an SOE if it is operated like a private firm. Once again, it is clear that governments should accept that if an industry is declining, the government should concentrate on encouraging replacement industries to develop, rather than trying to keep dead ducks alive.

The car industry - still worthwhile in mature economies?

Today Jaguar Land Rover, the British sports and offroad car manufacturer (which is actually owned by the Indian company Tata) announced that it plans to close one of its three UK factories in the next ten years, to consolidate production onto one site. Meanwhile the UK's Business Secretary Lord Mandelson has claimed that the Canadian car parts firm Magna's plans for the Vauxhall and Opel divisions of General Motors, which it is purchasing, are not commercially viable. Mandelson's reasoning for this is unclear, except that it is claimed that 1,100 jobs will be lost in the long term.

Historically the car industry, as a second industrial revolution industry, has been at home in mature economies where it produced linkages with other parts of the second industrial revolution economy, backwards into the steel, tyre and electronics industries, and forwards into the distribution and retail sectors. Indeed David Landes suggested that these linkages made the car industry "the industry of industries", perhaps the most vital to a modern industrialised economy.

However, the position of the car industry in many western countries has been one of decline for many years; the decline of the US big 3, General Motors, Ford and Chrysler in recent years being one sign of this. In the UK the position has been similar, with the UK's motor industry gradually consolidating through the 1950s and 1960s, then being forced into the super-consortium British Leyland (BL) by the government in 1968. Government believed that the failing British Motor Holdings could be saved by merging it with the successful truck and bus manufacturer Leyland, thus preserving employment. BL was unable to carry out the necessary rationalisaton of ranges, and its competitive position faltered to the extent that the government nationalised it in 1975 to preserve employment in the industry, and that of related industries. The Thatcher government was able to slim down and privatise BL as Rover in 1986, but even this has passed through a number of (government supported) owners and gradually withered away.

Given this history of unsuccessful government intervention in the industry, and history of gradual decline, its all the more amazing that Mandelson still believes that the motor industry in the UK has a viable future. While its clear that there is still potential for the industry in the UK as cars are expensive to transport, they are becoming increasingly cheap to make as Asian manufacturers find new scale economies in car production, seeking to boost the mass market in their home countries. Jaguar Land Rover's owners Tata, for instance are already making a basic car with a price to the consumer of less than US$2,000. It seems unlikely that British manufacturers could match these sort of economies in the long term, which must eventually make importing worthwhile, for the volume market at least. Surely governments in developed countries would be better to allow car manufacturers to make the savings required to remain competitive rather than forcing them to produce cars that they won't be able to sell to consumers. Such a strategy will mean that the present state interventions won't be the last.