Looking East
16 February 2009
Mervyn King, the governor of the Bank of England, has warned that the UK is “in a deep recession.” The Bank forecasts that the economy will shrink by 4% from mid-2008 to mid-2009.
In fact, their forecast for this year has been heavily revised downwards since the previous one was issued three months ago, but King states that since the Bank's last forecast in November, a severe economic downturn has taken hold around the world. “Growth in the advanced and emerging market economies fell sharply towards the end of last year. And world trade is contracting rapidly,” he said.
Indeed, it has been reported that Japan's economy contracted by 3.3% in the last quarter of 2008; its worst showing since the oil crisis of the 1970s. This compares to the US’s 1% contraction and the Eurozone’s 1.5% decline; which itself was the biggest in at least 13 years. The contraction means that Japan’s economy shrank at an annual pace of 12.7% during the October to December period, leading Economic Minister Kaoru Yosano to say that Japan faced its worst economic crisis since the end of World War II.
The world’s second-biggest economy has been hit hard by falling global demand for its products. It seems that exports of electronics goods and cars have slumped and production has been slashed because consumers are cutting back, amid rising unemployment rates. It is claimed that as a result, the Yen may weaken 13% against the dollar this year as Japanese exporters lose competitiveness and the nation’s economic slump deepens, state Asia Genesis Asset Management Pte. The collapse in external demand for Japanese manufactured goods apparently accounted for 3% of the contraction, as major automotive and electronics makers slashed production to reduce their inventories. Exports, which account for around a fifth of the Japanese economy, fell by a record 13.9% during the quarter. Consumer spending, which accounts for 55% of GDP, fell 0.4% amid slumping demand for cars, electrical appliances and clothes.
It was reported in EMTww last December that Sony was axing 8000 jobs (Land of the rising sun and sinking hearts), because it is vulnerable to a weak export market as around 80% of its sales are overseas. Without domestic sales, it looks likely that other Japanese companies are going to follow in Sony’s footsteps.
And without sales of exported goods, the UK is probably heading for the same fate.
BMW has recently hit the headlines with the announcement that 850 jobs are to be made redundant at the Cowley plant in Oxford that manufactures the Mini. Agency staff that worked at weekends have lost their jobs with immediate effect, and the site is closing for a week amid falling sales. The carmaker has also said that it had identified 150 surplus workers at its Mini plant in Swindon. Overall, BMW sales fell by 4.3% in 2008, to 1.4 million vehicles, although Mini sales rose by 4.3% last year to 232,425 cars. The carmaker is the latest in a long line of manufacturers in the UK to announce plant closures and redundancies. Honda has closed its plant in Swindon for four months between February and May, Toyota has suspended one of the night shifts, and Nissan made 1200 positions redundant at the end of last year.
These cars, manufactured by German and Japanese companies in the UK, rely on export sales. But they are sat on docks such as Southampton and Avonmouth waiting to be exported, and remain parked due to dwindling demand. This is going to have an effect on all the industries that supply the automotive trade, and electronics is just one of many.
In 2008, global vehicle production fell by 3.0%. US output plummeted by 19.8% and West European production was down by 10.3%. Consequently, automotive electronics output managed only a 0.4% increase in 2008, compared to a 10.1% surge in 2007. This year, the combination of slumping vehicle demand and even more intense price pressure is predicted to drive down automotive electronics production by 5.7%, according to Henderson Ventures.
At the end of last year, Mervyn King visited Bosch’s UK head office in Denham, to gauge how the changing economy was affecting business. During the meeting with King, Managing Director of Bosch in the UK, Robert Meier, said: “The current economic climate has meant that Bosch has had to revise our expectations for business development during 2008 and there is no doubt that there will be challenges during 2009; nevertheless, despite the current downturn in the global financial market our focus remains on our long-term strategy. Over the past few months, the drop of the GBP against the Euro has had a notable effect on our margins. As a company that is involved in both the import and export of goods, a stable exchange rate is required in order for us to accurately forecast our performance or make considerable investments. The continued lack of consumer confidence in the economy has once again seen UK new car registrations fall by 37% in November 2008 in comparison to the previous year. This decrease in car sales means that UK car manufacturers have to react quickly to the reduction in customer demand through the introduction of extended Christmas breaks, reduced work hours and redundancies. This in turn has a knock-on affect on Bosch’s orders from our automotive customers and our production levels.”
It has been rumoured that Daimler and BMW will co-operate in electronics procurement; a move that will affect both companies' production and procurement activities in the US and China. BMW is said to have a procurement budget of €26 billion annually; a figure that includes a range of parts the company buys for its car production, but the manufacturer has announced a cost cutting programme at a volume of €6 billion by 2012. Buying electronic parts in larger volumes as a result of a procurement co-operation would significantly cut costs.
We’re all watching and waiting with bated breath to see what happens, but deep down, we all know that the short-term future is far from bright.
This week’s leader was written by Paul Wolfe, EMTww’s Assistant Editor.
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