End of the line?

Business leaders around the world are in the spotlight these days as they struggle to cope with the global financial crisis. But while the crisis has claimed a number of high-profile corporate victims, the greatest impact is being felt by consumers themselves, people whose livelihoods and pensions are now threatened. It's no surprise, then, that families everywhere are tightening their belts and cutting back on non-essential purchases, and a number of industries are languishing as a result.

The auto industry is one that has been particularly hard hit so far. Sales of new cars have declined sharply, resulting in production and staff cuts. Indeed, the European Automobile Manufacturers' Association anticipates that the number of people employed in the global auto industry will have decreased by 100,000 by the end of 2009.

Worldwide crisis

General Motors has seen the greatest fall in business, and the firm announced in late November that it might run out of funds by the end of the year, having absorbed enormous third-quarter losses. To avoid bankruptcy, GM said it would lay off 30,000 people from 12 of its North American plants.

European and Asian automakers are also cutting staff. PSA Peugeot Citroën plans to lay off 2,700 people and has suspended production at plants in Slovakia, Spain and elsewhere. Renault has suspended production at plants in Turkey, Romania, Spain and France. Layoffs have been announced by Mazda and Isuzu.

Even as they shed employees, auto makers are turning to various governments for aid. GM's German subsidiary Opel has appealed to the German government for E500 (zł.1,921) million. Chancellor Angela Merkel has said the final decision will be made by Christmas. And Detroit's Big Three - GM, Ford and Chrysler - have pleaded with Congress for a $25 billion bailout package. They are due to submit a restructuring plan on Tuesday, and Congress is expected to consider it in a special session called for next Monday.

Opel sets the pace

The industry in Poland is already feeling the crisis - and it's expected to get worse, since a number of large producers are present here, including GM, Fiat, Toyota, Volkswagen and MAN, as well as a range of subcontractors.

Recent production figures have been strong. A total of 869,536 cars were produced in 2007, representing 21.6 percent y/y growth, and the first nine months of this year saw 800,585 cars manufactured, a 30.3-percent y/y growth, according to Automotive Market Research Institute Samar data, as quoted by motor industry Mojeauto.pl.

Out of the total 85,961 new cars built in September, Fiat Auto Poland had the largest share (48.7 percent), followed by Opel Polska (21.8 percent). Over 90 percent of cars produced in Poland are exported.

But the last few months have seen international sales drop and local cuts in production.
"The symptoms of deterioration are clearly visible," according to Piotr Wyszogrodzki, a senior manager at PricewaterhouseCoopers (PwC) and an expert on auto markets.

The Opel factory in Gliwice was the first to make cuts, suspending production for 15 days in October. The company recently announced a further two-week halt on production to take place before the end of the year. In order to adapt its production to lessening European demand, the Gliwice factory also reduced shifts from three to two and transferred part of its workforce to perform tasks previously carried out by outsourcing services.

"We are doing everything [we can] to make the situation as painless for the employees as possible," Wojciech Osoś of General Motors Poland's press office told the Polish Press Agency.

The Gliwice factory produces Opel's Astra III sedans, Astra II Classic and Zafira models. It built a total of 158,500 cars in the year to September, as compared with 151,600 in the first three quarters of 2007. The company estimates that production in 2008 will not surpass last year's total of 187,000 cars.

Other losses in Poland

Opel is not the only manufacturer to feel the pinch. In November, German bus and truck producer MAN announced plans to lay off 150 employees at its Niepołomice factory and 300 employees, out of 2,800, in Starachowice. MAN launched its Niepołomice factory last year with some 650 employees on its payroll and expected to hire more workers. The E100 (then zł.376.7) million investment was to produce 15,000 trucks annually, increasing production to 30,000 units in H2 of 2008, but the factory was forced to reduce production due to lower demand in Ukraine. Swedish car maker Volvo has frozen employment at its bus and backhoe-loader factory in Wrocław, despite a need for new employees at its Volvo Information Technology Polska subsidiary - located in the factory - a company representative told Puls Biznesu.

The Polish car-parts industry has also seen trouble. The largest employer in the Warmińsko-Mazurskie voivodship, the Michelin factory in Olsztyn, has been forced to reduce production. With 4,000 employees on the payroll, the company has not yet seen any layoffs, but these could be in the offing.

On the other hand, car upholstery producer Inter Groclin Auto has already made a number of redundancies and more are expected. The firm cut over 340 people from its workforce in H1, 300 in Q3 and a further 600 employees at its production facilities in Grodzisk Wielkopolski and Karpicko could be affected.

Mass layoffs by Škoda in the Czech town of Mlada Boleslav will affect Polish and Slovakian workers as well as Czech employees. The plant has reduced its workforce by 1,600 people so far.

Many auto sector employees are now part of Poland's growing number of unemployed workers and this trend may continue. "There is no reason to panic, but the worst is yet to come," Leszek Lerch, a partner at Ernst&Young, told WBJ.

Subcontractors in peril

As primary manufacturers have suffered losses, subcontractors have in turn been hit. These firms are found throughout Poland and include such international investors as Delphi, Faurecia, Lear, Valeo, as well as a number of domestic-capital-based firms. For many of these companies, especially the smaller ones, the impact of the crisis in the industry may prove fatal.

"These are often smaller companies with limited access to financing, operating in very specialized branches," Wyszogrodzki said. On the other hand, these firms' relationships with larger firms may offer some protection as auto makers will be reluctant to lose good subcontractors. "[Car manufacturers] may have problems regaining them when the crisis is over," he said.

One tactic for these firms to survive the crisis is to broaden their offers to include the spare-parts market as well as manufacturers directly, according to Tomasz Starus, the head of the risk assessment department at Euler Hermes. They might also diversify their client portfolio and search for new business in the farming machinery sector, for example, he told news site www.psz.pl.

A last resort

So far, most of the layoffs have involved workers on temporary contracts, but fears are growing that those employed on a permanent basis will also be at risk. However, experts interviewed by WBJ were cautious about making predictions.
"It is difficult to say if further layoffs will follow," E&Y's Lerch said. PwC's Wyszogrodzki added that large-scale layoffs would come back to haunt manufacturers. "It would be unwise to reduce the workforce and then have to invest in training new people when the crisis is over. Layoffs are the last resort," he said.

Little room to maneuver

Demand for cars in the Polish market is relatively steady, unlike in Western markets, and sales of new cars in Q1-Q3 2008 grew by 13 percent y/y, according to Samar. However, this figure is too low to have any impact on local factories, experts interviewed by WBJ agreed.
"This is just a drop in the ocean," E&Y's Lerch said, explaining that the fate of Polish auto production is dependent on whether citizens in countries like Italy and Germany purchase new cars in the near future.

While the slowdown is raising huge concern, there is little that Polish auto makers can do to fight it. "We do not have [much] influence on the situation, as global macroeconomic conditions are the decisive factor," PwC's Wyszogrodzki said.

Tightening the (seat)belts

The auto industry can only watch and wait as the situation develops, and time is not on its side. "If production does not gain momentum in Q2 2009, the situation will be very bad," EY's Lerch said. He added, however, that some analysts estimated the market would not rebound earlier than 18 months from now.

Wyszogrodzki agreed, saying that no boom in production should be expected sooner than in a year's time. "Consumer optimism must rise again, but the crisis is not over yet and the industry has to take a deep breath and tighten its belt," he said.

Wojciech Traczyk, a journalist from industry website Mojeauto.pl, also told WBJ that Poland should not expect a rebound soon, but the downturn in the industry would begin to slowly level off in the near future.
"I'm hopeful that the market will stabilize," he said, "and that firms in Poland will not suffer further."

Konrad Kiedrzyński