Car bailout failure could force overdue shakeout

PARIS (Reuters) - Economic purists might argue the U.S. Senate's rejection of a $14 billion rescue package is a good thing, finally forcing the car industry to take painful but necessary steps toward commercial viability.

In reality, such an uncompromising cure could prove worse than the illness and some analysts warn of consequences far beyond the industry itself if the U.S. government walks away.

"What will happen if General Motors goes into chapter 11? It will be bad for car parts suppliers and many carmakers have the same suppliers. It will be a meltdown, it is a systemic risk," said Gaetan Toulemonde at Deutsche Bank in Paris.

In the U.S., auto industry consolidation and restructuring is long overdue and any financial assistance to the ailing sector would have given the American makers a competitive advantage against their overseas peers.

European and Japanese rivals would then have been forced to ask their governments for financial assistance simply to level the playing field. But this crisis and the economic downturn it has triggered may finally be the spur the industry needed to solve its own problems with plant closures, alliances, mergers or even bankruptcy proceedings. If there is still time.

TOO MANY CARS

In a nutshell, there are either too many car factories or too few car buyers in the world. In 2007, 53 million cars and 20 million commercial vehicles were made, up 5.7 percent from 2006.

The OICA world car industry body says 8.4 million people worked in car and car parts production in 2006 in the biggest 39 countries of the world. It said the figure was 50 million people when related jobs are added.

Carmakers have been slashing costs to make their operations more efficient and have been ramping up production of cheaper models for new clients in emerging markets.

But the race into India and China, Brazil and Argentina, as well as the growing Russian market simply delayed any effort toward making more efficient cars, more efficiently.

The steep rise in raw materials prices and increasing pressure toward more environmentally-friendly engines -- such as hybrid and electric vehicles -- have made car making much more complex.

The need to spread the billion-euro cost of new engine plants or a car platform over a larger number of vehicles has triggered various responses.

General Motors and Ford have acquired European firms and hold strong market positions with Opel/Vauxhall and Saab for the one and Ford and Volvo for the second.

Volkswagen snapped up Seat and Skoda as well as Lamborghini and is now a de-facto unit of Porsche.

Renault struck an alliance with Nissan Motor after merger talks with Volvo collapsed.

It acquired a large stake in Russia's AvtoVaz, maker of Lada, earlier this year.

PSA Peugeot Citroen, itself the result of a takeover, struck product alliances with a series of other makers such as Ford and BMW for engines, Mitsubishi Motors for sport utility vehicles and Fiat for commercial vehicles and minivans.

Toyota Auto, the world's largest maker by volume, set up its own plants in Europe and the United States.

VALUE DESTRUCTION

But the price per vehicle for mass-market cars remained high and profit margins for the makers were thin to negative, making the car industry, with the airlines, among the top value destroying sectors in the world.

The answer was to seek cheaper labor by moving production to eastern Europe, Mexico, north Africa and mainland Asia. But wages there are now rising and local rivals such as Tata and Chery Automobile are emerging as powerful rivals in the local markets.

Scaling up is another way to reduce unit costs.

Last weekend, the chief executive of Fiat -- which in the past has held alliance talks with both GM and Ford -- told Automotive News that the crisis was stepping up consolidation.

"You need at least 5.5 million to 6 million cars (a year) to have a chance of making money," Marchionne was quoted as saying by the industry weekly publication.

In an interview published on Monday, he said he expected a consolidation wave in the next two years, leaving six players on the world stage, with Fiat linking up with one of them.

Although Marchionne did not name them, the carmakers whose production levels exceed 5 million cars include Toyota Motor Corp, GM, Volkswagen, Ford and Renault-Nissan.

"It absolutely makes sense. The downturn will precipitate the consolidation of the automotive industry," Societe Generale auto analyst Eric-Alain Michelis said this week.

(Reporting by Marcel Michelson; Editing by Chris Wickham)