Buying cars in 2009: Recession, auto industry slowdown and US bankruptcies

Thinking of buying a car, and feeling financially secure enough to pay the EMIs? This could be the best in a long time to take the plunge. Carmakers across the spectrum have cut prices by upto Rs 40,000, following the tax cut by the Unon government. The four percent cut in value-added tax was just what the doctor ordered.

The tax cut, however, did not happen in isolation. Governments across the world have been trying their best to boost sales in every sphere on the economy, where people have drastically cut back on spending. Across the world, sales of consumer goods - especially cars and homes financed by EMIs - have been declining, with mounting job losses and ?fear of potential job losses preventing consumers from taking loans.?

India has been relatively unaffected by the direct impact of the economic slowdown; however, the ripple effects are very much here. Despite the government’s sops, auto sales have declined in November by 18%.

?As demand slows down, auto makers like Tata Motors, Hyundai and Ashok Leyland have cut down production. It is unlikely that sales will rise in December either, forcing carmakers to keep prices low until the time demand picks up. In December, customers generally prefer not to buy vehicles and wait for the new year. The real impact of the tax cut, if any, will be clear in ?only by the end of January 2009. Most car launches planned for India towards the begining of 2009 have already been quietly pushed forward by ‘a few months’.

Big Three bankruptcies

Looming over the bleak economy is the potential collapse of America’s Big Three automakers - General Motors, Chrysler and Ford. If any of these companies with trancontinental operations go bust, it can spark a chain reaction, pulling down operations in numerous countries, affecting even successful rivals lke Toyota and Honda and leading to millions of jobs losses across borders.

It is true that the Indian arms of the troubled three US auto companies have been doing rather well. However, buyers tend to avoid cars which have foreign parents in trouble. ?This is because they fear a potential disruption in services and warranties if the parent companies go bankrupt. Remember what happened to the parts supply for the cute Matiz in India after its Korean parent Daewoo went bankrupt? In the US too, General Motors has - so far ?- shied away from filing for restructuring under bankruptcy, since it fears that people will not buy cars from a company under Chapter 11 protection. A bankruptcy at any of the Big Three can, in theory, force consumers to cut out that company’s cars while looking for a new set of wheels. This could be true of consumers in India as well.

The billion-dollar auto bailout

After much leading and grovelling, the US car CEOs managed to get a $15 billion loan from the US government, which they must repay by March if they fail to come up with a viable restructuring plan during that time. Simply put, they will have to cut thousands of jobs, renegotiate many contracts, abandon several car brands and get their creditors to agre to easier repayment terms. This is not going to be an easy task for the employers nor he employees, but that is the only way these companies will be able to keep their heads above water during these stormy times. And, since the loan is tied to their ability to restructure viably, a potential failure to do so can still drive them to bankruptcy.

Component companies

The auto bakruptcies can create a riple effect across nations. In India, China and Mexico, there are thousands of companies supplying a steady stream of parts - ranging from light bulbs to transmission systems - to the Big Three automakers in the US. With car sales declining in the US, these suppliers are ?already in trouble and a bankruptcy at Detroit can send hundreds of them belly-up across countries, and render additional lakhs of workers jobless. Just last financial year, India exported Rs 14,400 crore worth of components to the US alone.This year, it will be substantially less.

Now and beyond

Plus, there is the fact that in India, the effects of the slowdown are already well visible. The days of quick job-hopping are over, and so are big increments are salary hikes. Unlike the average customer in the US, Indians have always been keen on saving. With uncertainty on the horizon, the Indian customer is saving even more - and as they save more, the less they spend, leading to a further showdown in sales in all industries. It is a vicious circle, with no easy way out.

There is a silver lining in all this, though. A restructured US auto industry might turn out to be leaner and meaner. The Japanese companies are more efficient and are working towards even more efficiency, learning the right lessons from the crisis. No one expects the slowdown to last more than an year, though things would be tough in that period for sure. However, anyone who is financially secure and have plans for a car should not think twice. After the tax cut, prices for vehicles are really atractive, and dealers desperate for sales might offer even more discounts. If you are really in the market for a car, the time is perfect. And by buying one, you might even be doing your bit to keep the economy afloat!