Bail-out, Part II

The bail-out of the car industry continues. Even in Europe some rather established car makers have started to squeal for governments funds. Painfully, the venerable and capable Land Rover, now owned by Tata of India, is up for some financial loans to support it through a 35% dip in SUV and off-road vehicle sales.

In the previous posting in this web log, it was argued that GM and Chrysler in particular had been suffering the accumulated affects of mediocrity and feeble investment in R&D over many years. That view is maintained here. However, the emergence of brands such as Peugeot-Citroën, Land Rover and BMW in the cue of beggars for financial assistance, shows that we have now gone beyond reckoning with mediocrity. What we have here are economies of scale catching up with even the excellent.

By no stretch of logic can BMW be accused of mediocrity in any of its products. That firm has led the way in many aspects of the market sectors in which it competes with Mercedes, Audi, Lexus and a few others. Yet, it is expensive to operate at such levels of competence. The main market for BMW is the USA and with the bottom gone from that market - about 25% down - it becomes clear how top quality requires top quantity of sales to keep cash flow and balance sheet in check. It must be noted that in case of BMW, the appeal has been rather modestly for loan guarantees instead of the fat $15 hand-out package for GM.

Toyota suffered just under 26% in sales in the USA for 2008, while GM suffered 45% [Harold Tribute]. However, Toyota sits on $101bn of the international market whereas GM trundles about on a puny $1.5bn by comparison [Financial Mail]. Little surprise then that Toyota is not in the cue for charity, although it expects operating losses this year.

So, bail-out or not, the next scene in this economic pantomime is the big pruning and merging saga. Who floats and who drowns and who opportunistically sends out the rescue boats and tow-lines - that will be the question.

Rather telling in its absence from these reports, Porsche - quite small compared to BMW and (golly!) GM - recently merely announced a profit warning for the 2008 financial year. There is no substitute.