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Declining car sales, China’s market is going down, and Renault is accusing someone (?) of a “a purposefully orchestrated destabilization campaign.” All that and more in The Morning Shift for January 14, 2019.

1st Gear: Repent, Repent For the End Is Nigh

Okay, that may be a bit of hyperbole and exaggeration. The end is sadly probably not nigh, but a whole bunch of carmakers that have economists and smart math people on staff are thinking an automotive industry—or maybe an even broader economic—decline is in the cards.

The nervousness is largely driven in a 30 percent decline in demand for sedans, Bloomberg reports, as people dive into things like crossovers and SUVs instead. But there are larger signs of trouble:

The overcapacity plaguing U.S. automakers is the equivalent of 10 excess plants, which would account for at least 20,000 jobs directly, and thousands more as it ripples through the suppliers and support services to the massive industry. “GM has taken some actions, but they still have some well-underutilized plants,” Schuster said. “So we may not be done with this yet.”

One strategy for dealing with the collapsing car market in the past has been to stuff unwanted sedans into rental lots and other commercial fleets. That has only delayed today’s capacity crisis. Those lower-profit fleet sales have inflated the market, keeping U.S. vehicle deliveries above 17 million for the last four years, even as sales to individual retail customers peaked three years ago.

“The car recession and the retail recession have already arrived in the sense that retail sales peaked in 2015 and have gone down ever since,” said Mark Wakefield, head of the automotive practice at consultant AlixPartners. “Cars have just been crushed.”

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But here’s where it gets bizarre. A lot of the topsy-turvy market, the report says, has been driven by mistakes only half-learned from the past:

Ironically, automakers have the last recession to blame for their current plight. A decade ago, when high gas prices and a crashing economy left little demand for SUVs, the auto industry suffered through layoffs, plant closings and, ultimately, the bankruptcies and bailouts of GM and Chrysler. Detroit flipped its factories from making hulking SUVs to sensible, gas-sipping sedans.

“You had two quick, upward movements in gas prices in the 2000s that were like a one-two punch,” said Wakefield, “and it was like a dog whistle went off, and you couldn’t sell” SUVs. His firm helped guide GM through its 2009 bankruptcy. “It felt like gas prices would go up and stay high,” he recalled.

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It doesn’t take a mystical brain-genius to figure out the alarm sirens blaring right now, either. Automakers saw brief but sharp upward movements in fuel prices ten years ago, so poured a ton of money into sedans.

And right now there are low fuel prices, so a lot of manufacturers (COUGH Ford COUGH General Motors COUGH Fiat Chrysler COUGH) are pouring a ton of money into big SUVs. Instead of, you know, building out a wide and varied product lineup, with the right factory capacity, kind of like Toyota and Honda and Mazda, so that the business can weather all storms, like when fuel prices inevitably rise because no commodity maintains a static price forever, least of all not oil.

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Constantly chasing the low-hanging fruit of today is how you end up with the rotten apples of tomorrow. But what do I know, I’m just a blogger who hasn’t spent the entirety of their career being a Big Three lifer, and the American auto industry has always been fine forever.

2nd Gear: China’s Declining Car Market

Speaking of putting eggs in big baskets, global automakers are increasingly dependent on the huge Chinese car market. Which is great, as long as the Chinese car market is on the up-and-up. Until it isn’t. Like it is now. And while tariffs are part of that story, another big part of it is “declining consumer confidence,” or just plain old crappy economics, the Financial Times reports:

Analysts say they expect the chill in the Chinese car market to continue for at least another six months with Beijing reluctant to hand out large tax breaks as a stimulus to sales as it did in 2015, the last time the market saw a significant slowdown.

China in 2015 halved sales taxes for cars with engines smaller than 1.6 litres — a category which includes many SUVs — boosting sales by more than 4m in the following two years, according to Paul Gong, an analyst at UBS. The tax break ended in January.

“The biggest reasons for the decline this year are the hangover from the tax break policy, and declining consumer confidence,” Mr Gong said, citing a downturn in China’s stock market and a general economic slowdown due to Beijing’s drive to reduce debt in the economy.

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Everything’s fine!

3rd Gear: Nissan’s Ghosn Probe Expands to His Lieutenants

Big companies tend to have complex corporate structures, and in that complexity is often where nefarious financial wrong-doings by corporate executives are hidden. A report from Reuters alleges that, while not illegal, “governance issues” and “potential conflicts of interest” may have arisen from how former Nissan chairman Carlos Ghosn paid his top lieutenants:

One of Renault (RENA.PA) boss Carlos Ghosn’s senior executives received an additional six-figure salary unknown to the carmaker’s board via the Dutch joint venture overseeing its alliance with Nissan (7201.T), according to sources and documents seen by Reuters.

Ghosn and Nissan senior director Greg Kelly, who are at the center of a financial misconduct scandal engulfing the carmaking alliance, approved payments totaling 500,000 euros ($572,000) to Renault General Secretary Mouna Sepehri, who is responsible for corporate governance in her role as board secretary.


There is nothing to suggest that the payments by Renault-Nissan BV (RNBV) were illegal or violated Renault-Nissan rules, but they highlight governance issues and potential conflicts of interest.

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If I’m reading this Reuters report correctly (again, it’s complicated!), there was a separate company based in the Netherlands set up to officially oversee the Renault-Nissan-Mitsubishi alliance, and it mostly existed on paper for a variety of business reasons. But in order to pay certain people more, Ghosn allegedly paid them as executives of the Dutch company, in addition to the pay they got as part of their regular jobs at Renault and/or Nissan and/or Mitsubishi. Without corporate board approval.

And, as Reuters notes, that’s not necessarily illegal. But it’s funky.

And I’m sure not remotely uncommon at large corporations.

4th Gear: Renault Gets Paranoid

Seeing the Reuters report, your reaction if you were Renault might be all “well that’s fine, Reuters, but the truth will prevail in the end!”

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But no. Renault is coming out swinging, alleging a nefarious conspiracy in a press release (emphasis mine):

Reuters News Agency has divulged personal data relating to Ms. Mouna Sepehri, Executive Vice President, Office of the CEO of Groupe Renault.

Groupe Renault wishes to reiterate that:

  • The latest update on the ongoing review process relating to the compensation of the members of Groupe Renault Executive Committee provided by the group Ethic & Compliance Department, with the assistance of independent outside experts during the information meeting of the Directors of Groupe Renault held on January 10, 2019, also addressed the personal situation of Ms. Mouna Sepehri.
  • This latest update of the review process covered the remunerations paid by Renault and its subsidiaries – including RNBV.
  • The review process has concluded that the remunerations are compliant and exempt from any fraud, in respect of all the current members of Groupe Renault Executive Committee, including Ms. Mouna Sepehri, for the 2017 and 2018 financial years.
  • Per the initial mandate, the review process will continue with respect to previous financial years.

Groupe Renault considers that the publication of allegations against an executive of the group, a few minutes after the meeting of the Directors of Groupe Renault, is part of a purposefully orchestrated destabilization campaign.

Groupe Renault finally notes that the press release published by Reuters News Agency contains information that is either erroneous or arranged in a deliberately biased manner, as well as personal data; they state that Groupe Renault reserves its rights to introduce legal proceedings as may be necessary.

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I’m not sure what possible benefit Reuters could derive from a nefarious conspiracy to bring down the Renault-Nissan-Mitsubishi alliance, but sure Renault, put your tinfoil hat on, turn your radio dials over to the aliens, and rant and rave about the lack of curvature of Earth while you’re at it.

Salary opaqueness only serves the bosses, anyway. Workers should always know what executives make.

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You will find no pity here.

5th Gear: Let’s Check in on Our Boy Ghosn

Speaking of Renault-Nissan and Carlos Ghosn, how is Carlos doing? He’s been in jail for a while now, surely his prospects must be improving? Here’s the Wall Street Journal:

In Japan’s justice system— which has ensnared former Nissan Motor Co. Chairman Carlos Ghosn—the confession has a central place, and the treatment of suspects often revolves around extracting one. Suspects can be held for weeks or months of daily interrogations without a lawyer present. If they admit wrongdoing, they can clear a path to freedom. If they resist, they may stay behind bars for as long as a year awaiting trial.

Shoko Egawa, a journalist who served on a government panel about overhauling the legal system, said judges rarely questioned a confession, no matter how it was obtained, leading prosecutors to rely overly on the tactic. “The biggest problem lies with the courts. They just keep on accepting [confessions] because it’s the most economical” way to resolve cases quickly, Ms. Egawa said.

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Oh. Well then. It’s not like American system is much better.

Reverse: Innovation Makes Things Cheaper

Although the Model T has been around since 1908, the first Ford Model T that was made on an assembly line was completed. It simplified assembly of the Ford Model T’s 3,000 parts by breaking it into 84 distinct steps performed by groups of workers as a rope pulled the vehicle chassis down the line.

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Neutral: What Will You Be Driving in the Next Recession?

And why is it a bicycle?