While GM and Chrysler slide closer to bankruptcy, the rest of the car industry is not looking quite so dire. Ford has managed to pull off a major debt reduction program reducing interest payments by $500m a year by bringing debt down from $25.8bn to $15.9bn, in part through Ford Credit buying unsecured notes and holders of other senior debt notes taking shares and cash. On the other side of the pond, Fiat and Renault shares have risen spectacularly since the beginning of the year with Renault rising 102% last month and Fiat rising 27% in one day according to the Financial Times.
The European car industry share prices in general have risen some 38% on the expectation that they stand to gain from a number of developments. Some European governments have been supporting the industry by offering incentives to buyers scrapping older less efficient cars for new models as we wrote about last week. Fiat and Renault, makers predominantly of smaller cars, have benefitted more than most from this move. In addition, European car makers look at the possible demise of GM and Chrysler with a mixture of horror and fascination, horror that such major icons of the auto industry could fail but fascination that with car production at 94m units and demand some 30m below that major rationalization is required and for those that survive the opportunities will be that much better.
The big question on everyone’s mind in Europe is what will happen to GM’s European operations according to an article in the FT. Saab went into receivership (similar to chapter 11) in February and a buyer is being sought, so far without success. But GM’s Opel (Germany) and Vauxhall (UK) brands have many viable current and new cars in their line up, nine production plants across Europe and profitable production of 1.7m units last year. Several sovereign wealth funds and private equity firms are said to be interested in taking a majority stake but one sticking point is Opel’s relationship with GM and the possibility the parent could go under. Opel/Vauxhall rely on the parent for joint product development, design, engineering and some parts, functions not easily replicated if severed from the parent and costly to carry on it’s own. However sales are comparatively brisk particularly for it’s smaller more fuel efficient models and GM USA is hopeful a clear letter of intent will be signed within the 60 days deadline laid down for significant debt reduction to clear the path for further US aid.
European car sales are far from rosy but the interest in buying assets and the strength of the share prices show that investors at least see a viable future for the industry is not far down the road. A note to the US administration could be very little state aid has been directly pumped into the European car industry apart from support for new product development, nearly all the support has been in incentives to get consumers buying again and in the process reduce fuel demand by favoring more efficient vehicles. European producers enjoy a more level playing field than the union hamstrung GM/Chrysler combo face against their southern states non unionized competitors. But in terms of efficacy, the new car incentive scheme has proved surprisingly successful in supporting the industry.