The Auto Support Package: Too Little Too Late?

By David Bailey on Jan 27, 09 10:44 PM in Automotive

Earlier today the government finally unveiled its eagerly awaited auto industry support package worth £2.3bn. Lord Mandelson stated that the government would provide loan guarantees to auto manufacturers and larger suppliers to try to overcome the collapse in car sales which the industry is facing (December sales were down by nearly 50%, year on year).

As readers of the Birmingham Post will know, thousands of jobs have already been cut across the sector, with extended shut downs and part-time working the norm as the industry faces an unprecedented downturn. Jaguar Land Rover has laid off nearly 2000 workers, Nissan some 1200, and Aston Martin a third of its staff.

Factor in supply chain losses and my back-of-a-beermat calculation suggests that we've already seen around 10,000 job losses already.

What was welcome today was the recogniation by the government that the sector was strategically important, that it was not a 'lame duck' (unlike some US firms) and that this was not 'a bail out'. Whilst Mandelson argued that today's package provided a 'significant boost' to the sector, he stressed again that there was no 'blank cheque'.

Well, this is all a good start but the money on offer is limited and the measures incomplete, and one wonders whether this too little, too late...

The situation facing the industry is dire. Output last year was down 6%, and with this concentrated in the latter part of the year, the annualised rate of decline is running at 12% - we could expect output falls of 15-20% this year if the government did not intervene.

The £2.3billion announced today comprises £1.3 billion in loan guarantees to unlock funding from the European Investment Bank (er... how long will that take?) and another £1 billion in loans for green investment. The latter is genuinely helpful and could support JLR which is investing some £800 million in vital new green technologies.

And yet... £2.3 billion is, as Ken Clarke pointed out, 'pretty small beer' for the industry, especially when JLR itself needs up to £1 billion in loans or loan guarantees (at commercial rates). That doesn't leave much for GM, Nissan, Toyota, Honda, BMW (Mini and Rolls-Royce), VW (Bentley), Ford (engines and vans) etc etc...

To be fair to the government it has already committed some £50 billion across all sectors to large firms but it is not clear yet whether this will be available to firms like JLR.

Other parts of the 'package' were unclear and we await further details. The Trade and Industry Minister, Mervyn Davies, has been asked to draw up plans to improve access to additional funding for car companies' financing arms. France has already acted on this, and one wonders why it has taken the government here quite so long to move - Davies is now being asked to 'draw up plans'...

Hmm, 'get a move on' might be a better request, especially as figures released by moneyexpert.com indicate that some 300,000 potential auto consumers have been turned down for a car loan in the past six months (see also The Guardian). That's where the demand side problem is, and so far the government has yet to act convincingly.

Of course, undepinning consumer credit will only support car sales in the UK, not production, so a European-wide solution is needed here so that UK car exports can be underpinned - here EU Trade Ministers need to come up with an EU wide consumer credit support package.

Two final thoughts...

1. The government is increasing the support for retraining by £35 million to £100 million. What we really need to see is a German style scheme whereby workers on part-time work can be part-funded for the rest of the week by the state to retrain so that they are not laid off and instead improve their skills. That way, when demand picks up again, jobs and skills are still in place in the UK, and have not been lost abroad.

2. It's disappointing that a tax incentive scheme to stimulate demand for new cars, as has been used in France and Italy, was not unveiled. Here, nasty old polluting cars are traded in for shiny new greener cars, with the state chucking in a tax break... that makes sense for the environment too.

Overall, today's announcement was a welcome step in the right direction, and the green investment element is very welcome. However, it lacked the detail to convince me that this went far enough. More detail is needed urgently on how the various measures announced by the government fit together, and exactly what support is available for consumer credit and training. In particular, how will JLR be able to access this support, and will it be enough?

So far, I'm left thinking that this is perhaps too little, too late, and that more needs to be done.

David Bailey is Professor of International Business and Economic Policy at the Birmingham Business School, and Chair of the Regional Studies Association.

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6 Comments

butch roberts said:

I think what we need is for the media to start talking about globable warming or some thing else for a while and give it a rest so things can get going again.I know good news is not what makes people watch tv but please just give us a 30 day break.

January 28, 2009 3:28 AM

Alex de Ruyter said:

Thanks David for this timely critical appraisal of the government's package.

One would hope that Mervyn Davies could use his "expertise" and contacts as a (former) leading banker to apply maximum pressure to the banks to start lending again and provide long-term support to viable companies that have been throttled by the credit crunch.

January 28, 2009 7:59 AM

John Clancy said:

I am worried that because the announcement yesterday did not specifically mention that parts of the automotive industry could, in addition to the £2.3Billion, access the first tranche of the £50billion Asset Purchase Facility announced by Mandelson on 19th January, it means that it is not intended that they will be able to do so.

I believe that JLR in particular should be able to take advantage of it. Simply guaranteeing some as yet unspecified number of prospective car loan applicants will not be enough. In the meantime bad things can happen and that can mean big job losses. I am sure that 6 months ago people were applying for car credit, I wonder how many have in the last month?

People's willingness to buy a car, I believe, will now be more driven by their judgement of whether they and/or their partner will have a job in a few months time, rather than whether they can get credit. Stemming the flow of unemployement in itself has an effect on consumer confidence. A vicious circle can be set up if fear of job-losses themselves then leads consumers to stop spending, especially on the 2nd biggest purchase most people make after their home: a car.

The government's Asset Purchase Facility scheme is for the Bank of England to purchase high quality private sector assets, including paper issued under the Credit Guarantee Scheme, corporate bonds, and commercial paper. The Treasury will authorise initial purchases of up to £50 billion, financed by the issue of Treasury bills.

I believe that JLR should test the system by issuing a corporate JLR bond based on its valuable Research & Development, or perhaps Tata should issue the bond. The government should be asked to buy that bond which it can retrospectively and genuinely apply to the massive R&D investement its has made (completely wasted if things go badly for it), it would effectively release immediate capital to JLR.

That will give JLR an injection of liquidity and take the pressure off, possibly staving off big job cuts. It will also reward them for the massive genuine investment already made in R&D which really marks them out as a great 'British' company.

The government, the taxpayer, can own an asset in JLR (a bond)and that bond can also be structured to generate bond income beyond its interest payment for the taxpayer through R&D licences attached to ownership of the R&D bond.

It could become a convertible bond (quite ironic!) and be able to convert to equity shares in JLR at some future date or event.

Corporate Bonds are perfectly normal entities in the market, it would not be an unusual act. Its purchase/investment would, though, involve the Bank of England showing confidence in JLR's future, which in itself will assist that very future.

It would clearly not be a bail-out, because the government is getting something in return and something which could be very valuable indeed in the future. The Commercial banks could in ordinary times have taken the bond. Now the Bank of England should.

Now I accept that this may not have been the strict intention of the Asset Purchase facility. But the scheme was clearly designed to buy up existing corporate bonds to create liquidity. I think creating a new bond based on existing R&D assets would be a neat idea and help protect jobs while assisting in the creation of a more efficient, more green automotive industry.

January 28, 2009 1:58 PM

David Bailey said:

Alex, a good point. Mervyn Davies is the man for the job, but the clock is ticking and urgent action is needed. A pan-European response to stimluate demand for cars is needed.
John - you make a critical point here. How do all these interventions fit together, and what does it mean to JLR? Can they use the asset purchase facility? They need some answers soon, and access to cash (at commercial rates) ASAP.

January 28, 2009 11:08 PM

james mcquaid said:

good blog... a diappointing package I thought given the size of funds involved, the need for action on the demand side (consumer credit) and a wage subsidy / training element...
why has Germany managed to come up with a wage subsidy package?

January 30, 2009 5:21 PM

limo hire manchester said:

With the current conditions, the government should have come in sooner. That is with a solid strategy and more funds of course.

April 27, 2009 8:26 AM