A state loan won’t help an ailing car company

BUSINESS IS VERY SIMPLE. If the money you collect from your customers exceeds the money you spend delivering the product and service, it works. If the money from customers falls below the costs you are in trouble. Borrowing to pay the losses cannot solve the problem. It makes it worse, as you have to pay the interest as well. You end up losing more jobs, as BL proved in the 1970s.

Good Boards of Directors saw this downturn coming months ago and told their CEOs to cut costs to get ready for it. Good CEOs did so. Bad Boards looked firmly in the rear mirror, accepted the authorities view, and did not ask their CEOs to take evasive action. Bad CEOs failed to alert their Boards, and carried on spending as if there was no recession. They deserve to lose their jobs.

Companies in automotive manufacture have one major cost – bought in materials and components. When you hit a downturn it is vital to cut back strongly on the amount of raw material and component you are buying. You need to cut back by more than the anticipated drop in your sales, as you need less stock to maintain lower production. In this downturn there is the added bonus that the price of the raw materials has collapsed at the same time as you need less of them, so if your buying department is any good there will be a huge decrease in the cash cost of your supplies.

The cost of labour is much smaller than the cost of parts and materials. Nonetheless you will need to take some action to curb it. The first thing to do is to stop all recruiting. Next, you ask all temps and short term contract labour to leave. Third, you offer voluntary redundancy packages to those who might wish to go. If you still need to cut costs more because your sales have collapsed, then you need to discuss with the workforce whether they would prefer to all go onto shorter time to keep the jobs, or whether they want to sustain the incomes of the many at the price of a compulsory redundancy programme for a minority. No sensible person likes doing all this, but one thing keeps you going when you have to do it – the knowledge that if you do not shed some jobs you could end up presiding over the loss of all the jobs if the business goes bust.

You may need bank bridging finance if you were slow to make the adjustments, but that can be no substitute for controlling the losses. You cannot ask future customers to pay more for the product to pay for the subsidy you gave to current customers. They will not be prepared to do that. State loans can be an excuse to put off the necessary adjustment. They are also a massive diversion of top management time from tackling the reality that costs have to be slashed to survive in dreadful conditions like the present.

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10 Comments

  1. Paul
    Posted December 22, 2008 at 9:38 am | Permalink

    I don’t understand why the Government just don’t suspend the tax on company cars for three years? Or even better scrap it all together?

    I get £850 a month car allowance. If I used it to get a car even in the mid range of my car list it would cost me over £250 per month in tax. So I do what a lot of other people do, I take the cash and buy a new car every five years.

    If they even just charged me income tax on the allowance as I pay now I would order a company car in the morning.

    In fact I only know of less than a dozen people still in the company car scheme once the tax rules where changed.

    Changing the company car tax scheme to make it a lot cheaper would shift more product, much better I think than wasting my taxes on cars no one is buying.

  2. Brian Tomkinson
    Posted December 22, 2008 at 10:24 am | Permalink

    Much of the demand for cars was based on unsustainable consumer borrowing encouraged by government. At the same time government was literally trying to price motorists off the road by a multitude of taxes and charges. Now the bubble has burst and the demand dropped, the government is scrambling around to see how it can give taxpayers’ money to a foreign owned car manufacturer for political considerations viz. fear of losing MPs’ seats in the Midlands. What a way to ru(i)n an economy.

  3. Acorn
    Posted December 22, 2008 at 10:25 am | Permalink

    Interesting piece in the Captain’s Log. Scroll down to “Why Detroit Can’t Compete”.

    http://www.financialsense.com/captain/log.html

    • Bazman
      Posted December 22, 2008 at 5:01 pm | Permalink

      Not to mention that they did not invest any of their profits from the no defunct SUV market and spent more time and money on mergers than concentrating on the business they are in. Designing and building cars people want. The private jets for the Directors in real terms is probably not much, is symbolic of their attitude.

  4. DBC Reed
    Posted December 22, 2008 at 11:02 am | Permalink

    The Guv has to wait till house prices bottom out,slap on a tax to stop them rising again ( best LVT) then bash out the cheap credit so people can buy Jaguars and what have you. In the present “system” such spending would be crowded out by eye-watering mortgage repayments. The firms have to be tided over till the house price bubble is deflated and will rise no more( with an LVT stake through its black heart).

  5. rugfish
    Posted December 22, 2008 at 5:12 pm | Permalink

    I might be asking the obvious here, but in a business which has no sales, exactly what will the workforce be making, for whom, and why ?

    The second question here is obviously rhetorical for government, or it can be a statement for those who actually have a brain in their head, and it’s this :-

    Why is it ‘fair’ for the taxpayers to subsidise the average weekly wages of staff, executives and directors of car manufacturers on anything higher than the unemployed non-subsidised businesses which the government let go to the wall in an environment without customers ?

    The simple equation is = Demand equals customers, product equals satisfied customers, good service equals more customers and more sales, but it has to start with CUSTOMERS with a demand and there isn’t any.

    No amount of money piled against a wall will create customers and no business can survive without them.

    Now what is the answer to the first question please ?

    • mikestallard
      Posted December 22, 2008 at 6:30 pm | Permalink

      Votes.
      For Mr Brown.
      Because he is a genius and he alone can save the United Kingdom from bankruptcy.

      • rugfish
        Posted December 22, 2008 at 7:17 pm | Permalink

        Hahaha, I hadn’t thought of that as it’s too ‘obvious’ an answer.
        I mean I must be thick or something so I’m regressing to the sound of Distant Drums by Jim Reeves on YouTube until January !

        Have a good Christmas everyone, ( and the folks at Jaguar, Woolies, MFI et al ).

  6. mikestallard
    Posted December 22, 2008 at 5:57 pm | Permalink

    If only the government would do what car firms are having to do: cut jobs; cut back on pensions; cut back on everything to balance the books.
    But, no, being professional politicians who have never been in business, the army, or in anything except politics and the law, they do the wrong thing: more spin, more money poured down the black hole.
    Do I really have to list British Leyland, de Lorean and the motor cycle industry again?

  7. Lola
    Posted December 22, 2008 at 11:37 pm | Permalink

    True, Mr Redwood, very true. But assuming that the car businesses have done all this and because the downturn is so severe, that is there are no customers at all, what else can they do? Are circumstances so exceptional that help is appropriate? And why should banks deserve lots of our cash – and they’ve genuinely made stupid mistakes – when manufacturers don’t?

    reply: Remember I opposed share capital from the state for the banks for the same reasons.
    The banks do need to be able to borrow from the Bank of England, their bank, just as car companeis need to be able to borrow from their banks, the commercial banks. Each case should be a commercial matter, with the Bank and banks taking proper security.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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