COMMENT: Of future contracts and deflation spirals

COMMENT
Franz W. Rother is Editor-in-Chief of Automobilwoche

Haggling over the details of Opel's so-called future contract went on until the very last moment. It is supposed to secure the plants in Ruesselsheim, Bochum and Kaiserslautern, Germany, until 2010.

It should also give a new perspective to the Saab plant in Trollhattan, Sweden, or so General Motors Europe in Zurich says.

But not even Saab's boss seems to believe that. Just two days before the future contract was signed, Saab CEO Peter Augustsson handed in his resignation.

People at the German Opel plants were not overly enthusiastic either. The agreement between the works council and company management comes at a high price. In the next few weeks, about 4,500 employees either will leave the company with a considerable lump-sum settlement in their pockets or will have to switch jobs.

Opel is looking for 1,500 more "volunteers" at the Bochum plant who want to quit their jobs next year.

Those who remain on Opel's payroll over the course of the contract will need to put up with pay cuts and will continue to fear for their jobs. The future contract's small print states that in case of a "significant drop in demand" - in this case a 2 percent market share decrease - all arrangements would be invalidated.

Thanks to employees' concessions, strikes and plant closures have been avoided, and Opel has gained significant cost and competitive advantages over its domestic rivals. But there really is no reason for employees or management to celebrate.

The basic problem remains. General Motors, like many other manufacturers, produces significantly more cars in Europe than it can sell. Consumer demand is low, especially in Germany, and as mass layoffs continue, that situation won't improve.

At the same time an increasing number of businesses are demanding wage cuts from their employees to improve their competitiveness. This further saps spending power.

The consequences of this deflationary spiral for the automotive industry are noticeable everywhere. People put off buying new cars, and they would rather go to a cheap repair shop for service than to a specialized garage. Those who finally do decide to buy a new car either choose a vehicle one size smaller than their previous one or change to a more cost-effective imported car from the Far East.

In the coming months, the market entry of Dacia and other low-cost imports from China or elsewhere will increase the predatory competition.

Domestic manufacturers' responses are price reductions, special financing campaigns and day registrations. This results in dealers going bust, increasing losses for vehicle manufacturers and suppliers, the outsourcing of production to low-wage countries, new pay talks and in the end further redundancies.

It's a vicious cycle, and it's not clear yet where it will end and how it can be broken.

The auto show in Geneva showed that carmakers place all their hopes on new models and body designs. Their thinking is that they might be able to draw in buyers with hot models rather than pull them in with incentives.

This strategy probably will not work for former Opel employees. They will need their severance pay for more important things than new cars.

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