Jaguar Landrover has just requested a £667 million loan from the British Government in order to continue operations in the current dire economic climate. I’ve spoken to a number of people on the matter, and what emerged was two wholly divergent opinions. One was that they should receive no support whatsoever. And the other was that not only was a support package a good idea, it was nothing more than common sense.

I will examine each in turn, but first lets consider why the automotive industry has found itself in such a difficult position.

Car production is a high volume, low margin business, in common with other highly commoditised products. But unlike other sectors, where premium products enjoy much healthier margins than their cheaper, less sophisticated counterparts, cars are always low margin. Porsche enjoy the greatest margins at around 8%, but most other manufacturers border around the 2-5% mark. In order to make such a business work, the volumes have to be tremendous, and lets not forget, we’re talking about expensive products here. When demand drops, the profitibility is disproportionally affected, because unless the producer can maintain economies of scale, the margins are negligible. This is why many factories close down for short periods, because it makes no sense to keep them open unless they’re running at near to maximum capacity.

But this ’survival mode’ also incurrs costs, without offering anything in the way of profitability. Unless a manufacturer is sitting on huge cash reserves, this might not even be a choice, and even if it is, it can only last for so long.

This is where Jaguar Landrover come in. Their core markets have been heavily hit by the credit crunch, and they certainly aren’t cash rich.

The Government could be accused of showing favouritism by backing the car industry, whilst ignoring other areas of the economy which are struggling; but the car industry is important. It employs close to a million people in the UK in directly related activities. And in turn, the wealth generated helps to support local communities, and other businesses. If those jobs were to disappear, then there’d be a huge rise in unemployment benefit claims in the short term. And once manufacturing jobs are lost to lower cost economies they will never return: the seed capital required, and prohibitive planning laws, would make it impossible. The largest growth area in the UK economy is the creative sector, but there’s no way that it could absorb thousands of new workers. Indeed, nothing short of a bold new power plant build program would come close to providing enough skilled jobs.

On the other hand, £667 million is a lot of money, and at recent profitibility levels, it is unlikely that Jaguar Landrover will ever be able to pay it back, even at low interest. And the days of state owned British Leyland are long gone: the Government is under no obligation to financially support private enterprise. Some may argue that the money would be better spent elsewhere, or indeed not spent at all.

Just a final word on Jaguar Landrover as a company. It isn’t gross mismanagement that has led them in to this situation. Even Toyota reported a loss for the first time in 70 years. These are exceptional times, and any decisions should be treated as such. I just hope that any action is decisive, and that it comes before it’s too late.

http://www.telegraph.co.uk/finance/newsbysector/transport/3900248/Jaguar-bail-out-must-come-in-days-not-weeks-warns-union.html