Clearing out the dead wood

The demise of LDV yesterday is a bitter blow to both the van manufacturer, its workforce and the company’s supply chain, but it was probably inevitable. I had hoped that Weststar had a plan for the company’s future, niche green or biofuel vans or something, but in all honesty it was always going to be a long shot.

However, as we begin what is likely to be the long and tortuous process of lifting ourselves out of recession, one or two things are becoming increasingly clear, namely that this recession will probably be more cleansing than catastrophic. The fear, as little as 3-4 months ago, was that good businesses of all sizes would be forced to the wall because of the dire economic news. That concern is now beginning to lift as the credit markets thaw and lending begins again as banks get used to their new status of being publicly owned.

With hindsight, we may therefore look back on this recession as being a cathartic clearing out of dead wood companies that have teetered on the brink, even in the good times. LDV will now unfortunately go into history alongside another acronym, MFI, and other companies which have failed to keep pace with the times, such as Woolworths and Whittards of Chelsea.

The path to insolvency for each of these companies was eerily familiar. A gradual loss of market share and consumer confidence, management buy-outs promising to resurrect the brands, fierce competition from massive, often global companies, able to exploit huge economies of scale, failure to adapt to changing market dynamics and an inability to identify and seize opportunities.

A former colleague of mine who advised Whittards told me once that the company really missed the boat with the explosion of the coffee shop culture of the late 90s and the rise of Starbucks. It limped on for a while, but the end was inevitable. The same goes for LDV.

Not exactly a ringing endorsement is it?

The perils of blogging are becoming ever clearer to me. My prediction that the Government will not intervene to save LDV is followed only days later by, wait for it, Government intervention!

Whilst I am glad that jobs will be saved, it is hard to view this as a ringing endorsement for the company. The facts are as follows: the Government will provide a short-term bridging loan of £5 million over a 30-day period while new owners Weststar get their finances in place. The key word here is loan. The Government wants its money back and quick. It’s not interested in equity (unlike with the banks) and it’s not interested in running it as a business. Labour Governments have been down this path before with a nationalised car industry, pouring more and more money into a bottomless pit, and they don’t want to go back again. Effectively the Government is saying: “This is your last chance. If you can’t make it work with Weststar, then don’t come running to us.”

One final thought. I do wonder whether political pragmatism is playing a part here. The Government is caught between a rock and a hard place. Do nothing and it effectively sacrifices half a dozen marginal Birmingham constituencies at an election which is currently scheduled for less than a year away. Jump in with both feet and it leaves itself wide open to Conservative charges of wasting public money (which we haven’t got) and a return to the dark days of the 70s and the spectre of highly unionised workforces in nationalised industries voting to strike in crowded car parks.

I don’t see Tony Woodley of the TGWU as a modern day Red Robbo, but the Government will be desperate to avoid that sort of television in our living rooms over the winter months.

LDV: A Bail Out Too Far?

The struggles at LDV are another nail in the West Midlands automotive sector and will undoubtedly generate more calls for Government bail-out money and cries of “why are the banks getting all this money, what about the automotive sector?”

Unfortunately, on this occasion, I can’t see the Government stepping in. A simple cost benefit analysis should demonstrate that LDV probably has neither the brand, nor the economies of scale to compete in the modern, globalised automotive sector, regardless of the current economic climate. Its competitors - Ford, Peugeot, Mercedes Benz etal have a scale which allows them to offer huge discounts to the fleet sector which I doubt LDV, without Gazprom propping it up, could compete with.

And, in the modern world, scale is everything I’m afraid. I remember talking to the CEO of one of the UK’s biggest buyers of white vans many years ago. His fleet, circa 60,000 vehicles on a three year replacement cycle, was dominated by Ford and Mercedes. Would he consider other manufacturers? “We get made some stupid offers, massive discounts to get a foothold in our fleet” he told me. “But the point is what the vehicle will be worth after three years? You can always get cash for a Ford or a Mercedes.”

The same could be said for bail-out money.