All carmakers' roads lead to Shanghai

London, New York and Shanghai: When the leader of Birmingham City Council sits down for talks with one of China's leading carmakers this week he will make a personal plea: please don't abandon us.

Mike Whitby will be urging the Shanghai Automotive Industry Corporation (SAIC) to "keep faith" with car production at Longbridge, once the epicentre of British motor manufacturing.

SAIC picked up the Birmingham factory from the wreckage of the collapsed Rover group and has begun making a limited edition sports car from the plant, employing around 200 people. But with the global financial crisis leaving no area of the industry unscathed, Whitby fears that plans to expand Longbridge could be put on hold. "A downturn is no time for complacency," he said before jetting off to China.

Whitby's visit underlines much about the crisis in the motor industry: the vulnerability of what was once a key part of British manufacturing; the globalisation of a sector now in recession; and the fact that emerging nations such as China, whose booming economy seemed unstoppable, are also feeling the heat.

General Motors, once synonymous with the might of America's manufacturing industry, is on the brink of bankruptcy. Thousands of GM jobs across Europe are also threatened, including at its UK operation, Vauxhall. The venerable Toyota has issued a profits warning. Last week, Germany, where one-in-seven jobs are dependent upon the motor sector, tipped into recession as the car industry contracted sharply. And India's Tata, whose deep pockets were the saviour for Jaguar and Land Rover, may have to rethink investment plans for the luxury marques it bought from Ford in March.

"This is a depression, not a recession," said Professor Garel Rhys, a leading car industry expert at Cardiff University. If you want an example of the pain suffered by the global motor industry, look no further than the UK domestic market. The speed with which the downturn has suddenly hit has shocked the industry. In September, new UK car sales fell a stunning 21 per cent, and came off an 18.6 per cent drop in Aug-ust. But the fall was even larger last month, down 23 per cent.

"October was the steepest monthly fall since June 1991, the height of the early 1990s recession," said Paul Newton, automotive analyst at Global Insight. "It is a stark indicator of the depth and speed of this economic slowdown ... How long this translates into real job losses is just a question of time."

However, the collapse in UK car sales tells only part of the story. Of the 1.53 million cars manufactured in Britain in 2007, more than 77 per cent went for export. With the euro zone now officially in recession, and economies across the globe contracting, export activity will decline. In the year to end-October, the western European market was down nearly 800,000 units, to 11.8 million, compared with the same period in 2007.

Since the collapse of the indigenous UK industry in the 1980s, the sector has been rebuilt into a leaner collection of businesses. Thanks to billions of pounds of foreign investment, the UK industry is among the most efficient in the world. Yet, so far this year, only Rolls-Royce seems to have escaped unscathed, with the company saying that sales are on target to beat forecasts.

Honda, Toyota and Nissan have announced production cutbacks in the UK. Jaguar and Land Rover are seeking redundancies. Mini, turned into a world-beater by owner BMW, brought forward its Christmas shutdown at the factory in Oxford. And this is only the beginning of the car industry's downturn. If GM (sales down 40 per cent in October) and Ford (down 30.2 per cent) cannot get the US state aid they crave, the knock-on impact in the UK could be serious.

In the third-quarter, GM burnt through $6.9 billion (£4.6 billion, Dh25.37 billion) of cash compared to Ford's $7.7 billion. Chrysler doesn't release profits figures as it is privately owned - but the red ink will have been spilled.

Amidst GM's liabilities - by far the largest after its $38 billion debt pile is its pension costs and post-retirement health costs, which stood at $11.5 billion and $33.7 billion respectively at the end of September - it should come as little surprise that in 2007, the average cost of an employee's pay and benefits per hour at the Big Three was $73, compared to just $47 at Toyota's US factories. With sales in freefall, the US giants cannot continue with such competitive disadvantages.

The Japanese have been closing in on the Detroit three for years, but they too are suffering. Toyota continues to invest heavily around the world for the long term, but two weeks ago reported a 69 per cent drop in profits and warned that it would barely make any money in the second half.

Korean carmakers have also run into problems, at home and in the US and Europe. GM will suspend work at its five factories in South Korea from late December, closing down its production for two weeks each month. Investors have been quick to trade out of Hyundai and Kia, whose shares have slumped on expectations of lower profits. Hyundai's sales in Korea fell 4.5 per cent in October.

Good news

Is there good news anywhere? Well, China's economy may be slowing but it still rates as boom-boom against other parts of the world. Toyota has increased sales by 50.2 per cent so far this year, selling over 310,000 cars with its joint venture partner FAW. Nissan had a 27.4 per cent rise and Honda gained 9.9 per cent. Hyundai sold 30.4 per cent more cars this October compared to last year.

China, though, is not without its problems. Manufacturers on the mainland had planned to sell 10 million cars this year, but have cut back their estimates to 9.5 million.

However, the picture is still rosier than elsewhere, with sales up 10.2 per cent in October compared to last year, and almost 15,000 new vehicles hitting the road every day.

So, when councillor Whitby arrives at SAIC's Shanghai offices for his meeting, he knows that he is going to the corner of the globe where the rout in the motor industry is having least impact. SAIC, the world's fourth-largest automotive manufacturer, may not be quite ready to sign off on its plan to double the Longbridge workforce and ramp up car production to 50,000 a year. But Whitby can at least be thankful that he is not having to make his case in Detroit.