Sunday, 29 July 2018

"Opel-Vauxhall reports first profit in almost two decades"

From The Independent:

Opel-Vauxhall has registered its first profit in almost two decades under the new ownership of France’s PSA Group, the maker of Peugeot.

Opel-Vauxhall made €502m (£447m) operating profit in the six months of the year on revenues of €10bn, the first time the company has been in the black since 1999. The numbers mark a turnaround from a €257m loss in 2016, the last full year when the company was under General Motors’ ownership.

Most things in economics follow some sort of pattern, but it baffles me why its parent company General Motors would keep going through thick and thin for nearly twenty years.

Maybe the costs of shutting everything down would have cost more in the short term than just running up another year's loss, in the vague (but folorn) hope that things would turn around in a year or two, throwing good money after bad.

Or maybe GM were not doing the transfer pricing properly and over-booking profits in the USA and understating them in Europe? But it's not as if GM globally was overly profitable either, from Wiki:

In May 2013 during a commencement speech, CEO Dan Akerson suggested that GM was on the cusp of rejoining the S&P 500 index. GM was removed from the index as it approached bankruptcy in 2009.

Which is all a word of warning for anybody who dreams of going into car manufacturing, you need real staying power and the ability soak up decades of losses while you make the leap to mass manufacturing and economies of scale. It's not like in the first half of the 20th century when there were dozens of small carmakers in every country, each grinding out a few hundred cars a year, they have all merged, been taken over or simply disappeared.

(Exactly the same thing happened with aircraft manufacturers (there were still 27 aircraft manufacturers in the UK in 1945), and the same thing has happened with internet/software businesses, only much more quickly.)


Lola said...

Warren Buffet doesn't understand the car business either.

Isn't a truism that markets trend to having about 6 major suppliers and a whole raft of smaller ones - say 20 ish?

In cars you have biggies including Honda, Toyota, Nissan/Renault, Ford(which owns 50% of Mazda), VW Group (VW, Porsche, Audi, Skoda, Seat etc), PSA (?) and GM. And Kia? and Hyundai?

Second string players include Jaguar Land Rover, and various other outfits including indigenous Chinese and Indian companies.

Below that are specialists like Atom and Lotus (although Lotus is part of Geely/Proton (a second string car maker).

Mark Wadsworth said...

L, yup. To paraphrase the Duke of Westminster, "if you want to build up a motor manufacturer, make sure you started before about 1960"

The far East started a bit later, is all.

Andrew S. Mooney said...

"Maybe the cost of shutting down is more than another years' loss."

"Loss makers" can be turned around by strategic re-purposing. One reason Vauxhall in the UK was useful to GM in Europe, as a whole, was low cost labour relative to Germany. GM's Opel plants are their core operation, but labour intensive things like engines and powertrain assembly, got done in the UK. FIAT, lacking such relatively cheap labour, went the other way and developed the "Fully Internally Robotised Engine" or FIRE powerplant as an alternative response. It is instructive that Ford in Dagenham similarly survives as, you guessed it, a powertrain and engine manufacturere, for Ford Europe in Cologne.

These days, low cost labour means eastern Europe and hence Vauxhall's sale to Peugeot, as Scallies are too expensive. (FIAT today has dropped the FIRE unit because the quality was always crap, and hand-builds it's TwinAir engines in Poland.)

Perhaps Ellesmere Port is cheap, say, relative to expansion in France? Unions, etc?

"Which is all a word of warning for anybody who dreams of going into car manufacturing,..."

Those early companies mostly sold luxury cars. The depression, WW2 and austerity are what killed them off.

State compulsion, not competition, is what consolidates most countries' car industries, France being a good example, but the vast majority of American car manufacturers didn't go out of business in the fifties because of expense, inefficiency or low production volume, but because of a forgotten factor: Advertising. The "big three," Ford, GM and Chrysler simply fire-hosed so much money on advertising that every independent car brand, Studebaker, Nash, AMC, Hudson, as well as start ups like Preston Tucker, could simply not meaningfully compete upon cost, quality, or famously in the case of Tucker, innovations like seat belts. The American public simply bought whatever was pushed at them the loudest, even when, as journalists like Vance Packard and Ralph Nader pointed out, the vehicles were clearly complete garbage.

Detroit was very keen that the public understood that small equaled cheap, cheap equaled pathetic and so what did that say about you? Hence, social stigma at being seen driving a small car.

As an outsider, you didn't need to soak up decades of losses, you simply needed a product that having tried it, your customers realised immediately is actually perfectly good. It effectively became socially "safe" to be seen driving one of those small, reliable, inexpensive Japanese motor cars, a VW Beetle, or a Volvo.

By the time of the oil crisis, budget cars were winners because they were inexpensive to run and clearly mechanically reliable, whereas an American car was a muscle car that did nine miles to the gallon, a 2-ton luxo-barge designed to farm your wages, or a joke wood panel station wagon that mom drove. Detroit offered no economy cars except shitboxes like the Chevy Nova and erm, the Ford Pinto, and, well, everyone knows the story of how much they cared about your business then.

"The far East started a bit later, is all."

Which as a statement is just breezy bullshit that explains nothing. How did the Koreans do it? How did companies like Hyundai and (Admittedly very briefly due to outside issues.) Daewoo, start up from zero and sell cars? The product was VERY basic, but it was reasonably reliable and so it found a market. Chevrolet had no presence in Europe until it bought Daewoo's orphaned car arm, proving the cars had value even if the brand itself was utter rubbish.

Conversely, Skoda anyone? Under Volkswagen they went from being clown cars to a solid VW entry model. The reason is comparable product quality to a VW or even an Audi, but on a budget. I'd bet that nothing from Skoda's Communist days survives as company policy except the production location in the Czech Republic.

Mark Wadsworth said...

ASM, true, most really early pre WW2 car makers made luxury cars, because by definition, cars were luxury items.

I take mild offence at "breezy bullshit" but apart from that, all good stuff, thanks.

Andrew S. Mooney said...

Mark Wadsworth: Apologies if it seemed a bit brusque. - It's just saying something like that is a form of answer without an answer: i.e. "You had to start early,...Asians just started later."

OK. That just irritated me because it's not an answer as to explaining WHY Asian car makers could start later, and WHY that worked.

Asian car makers benefited from the fact that US cars were categorically of poor quality, (US fuel consumption figures are laughable.) they also leveraged EPIC levels of racism, which offers a natural captive home market often using legislation, and further, enjoyed the same effect that Henry Ford had on the US, in that car industry wages could be used to bootstrap the broader economy. He famously paid five dollars a day, when the rest of the economy fought you over cents, embodying the tactic that if you don't pay your workers a wage, how are they going to afford your product? And if they can't afford your product, who can?

Asian economies are also nakedly Mercantilist and don't give a crap about their neighbours who apparently are just a limitless sink for all of their exported goods. From where they get their money from to buy it all is their own problem.

"Conversely, Skoda anyone? Under Volkswagen they went from being clown cars to a solid VW entry model. The reason is comparable product quality to a VW or even an Audi, but on a budget. I'd bet that nothing from Skoda's Communist days survives as company policy except the production location in the Czech Republic."

It seems that car manufacturing is intrinsically an exercise in leveraging low wages and elevating them to the point where eventually they cannot manufacture cars anymore, unless the whole exercise is heavily automated. FIAT did automation for while but got stymied by poor quality and that delicious low cost labour in Poland. Asian car makers appear to have embraced outsourcing to low cost countries on the back of the idea that if you literally OWN the factory in which those low cost workers are working, rather than them profiting from it, ultimately, all of the profits wind up back with you. So maybe, in using Skoda, VW has done the same thing. All of the money winds up back in Wolfsburg, or wherever the heck their headquarters is.

Mark Wadsworth said...

ASM, that's a fair explanation of how Far East manufacturers did it, but I assumed everybody new that, which is why I didn't go into depth.

Andrew S. Mooney said...

Mark Wadsworth: I don't think a lot of people either think those factors through or are even told them in the first place. I certainly wasn't.

The racism angle in particular, or the aforementioned "M" word, that is like having a light switch flicked on in your head when someone points it out in respect to Asian countries. The pile of cash is such that famously, these days companies like Sony make more money selling credit and financial services than they do selling electrical equipment.

Mark Wadsworth said...

ASM, that said, Japanese cars are very good for the price. They're not dumping subsidised jalopies on us.