The Monday world financial crash

The Monday world financial market crash. Global financial markets tumbled on Monday, signaling that a world recession has come. Around two weeks ago, it was hovering somewhere near 29,000. But at close of Monday, the index was at 23,851, falling 2,013 points for the day’s trading, or down by 7.99 percent. (This was the big event at deadline for this column.)

The road to this debacle was first slow in coming. The coronavirus economic impact on world travel and on global supply chain disruptions had first caused the sharp drops in equity markets and corresponding volatility in bond prices.

Then, the sudden oil price war unleashed by Saudi Arabia on price cuts in oil (over the weekend) had put financial and economic expectations in great disarray. From the normal price of crude at around mid-$50s per barrel, the price had dropped to around $35 per barrel, a great boon to oil importers, but it upsets global finances and expectations.

We are again facing hard, interesting, and to many, dangerous economic times!

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The Honda auto plant closing

Recently, Honda Car Philippines announced it would close its automobile assembly plant in Santa Rosa, Laguna, affecting the direct jobs of 367 workers.

Hard times? This loss will have a big ripple effect on other jobs in the area, because the loss of jobs produces a negative impact on other activities within the community. (Hence, some more job losses.)

However, it is a fact that in any economy, there are always simultaneous events of old companies closing and new ones setting up. In the current environment of suddenly difficult times (coronavirus economic downturn and other new risks), the Honda news comes as a blow to the country.

Moreover, Honda is a big brand in the world of autos. Any departure of prominent companies is a headline event, an uncomfortable one.

While it closes the auto assembly, Honda will continue its operations in the assembly and manufacture of motorcycles. So, perhaps, the troubling decision is muffled by continuing operations that sustain many jobs. Motorcycles continue to be a vibrant element of Honda’s Philippine operations.

A business decision. The decision to close the Philippine plant is part of a business decision. Simply, the operation was not producing the expected returns to the company. It was now operating in a competitive environment that was changing and the company had decided to source its assembly production from cheaper company sources within the region, mostly in Southeast Asia.

This was the same rationale that moved Ford to close its own plant some eight years ago in the same area in Sta. Rosa, Laguna. From a company viewpoint, the Ford Philippine operation was essentially footloose, small, and marginal. In the same context, so was the Honda operation.

Honda was also partly responsible for its loss of market within the Philippine operation. Honda lost competitiveness in the Philippine market. Its models lost market sales in the market. The local market moved toward the models of other competitors. Toyota, Mitsubishi, South Korean and other brands began edging out the Honda models, especially in the small car and SUV markets.

Honda’s international restructuring. Honda’s decisions on plant closure are even bigger in the United Kingdom and in Turkey.  They dwarf the Philippine closure.

Changed circumstances have affected Honda big time. Very briefly, it is possible to separate some of the major developments and causes: (a) The trade war. (b) Competition. (3) EU-Japan Trade Agreement. (4) Brexit. And (5) the electric revolution in cars.

Trade war and competition. An effect of the trade war was a downturn in demand for cars. Honda had been hit by competitive pressures (just as all the other companies in the industry) have been hit. Within this framework, Honda had been a loser to the other companies – smaller, and resurgent young car producers (South Korea, China) and even to the larger and established companies like Toyota and other companies producing in other markets, like Thailand in ASEAN.

The trade war that has engulfed China and the US had repercussions on world demand for cars, partly as a result of supply chain issues, loss of markets and incomes in producing and consumer countries, and the adjustments that trading blocs and countries are taking.

EU-Japan Trade Agreement. In the immediate context of trade wars, the recent free trade agreement between Europe and Japan has reconstructed made trade boundaries. It becomes more economic for Japan to ship cars from its home factories to Europe, making the UK and Turkey plants less competitive.

Some observers discount the effect of Brexit’s position from the EU, but the uncertainties facing Honda’s location in the UK was probably compromised. The UK factory involves the loss of 3,500 factory jobs. I have no information on the Turkey job losses, but they are definitely larger than our Santa Rosa plant.

According to Honda, their closures would enable them to increase the capacity utilization of their plants in Canada, US, and Mexico.

The electric revolution in cars. An important strategic factor in the Honda decision is how it perceives to play a role in the most disturbing revolution in the car industry – the electric car revolution which is being accelerated by the climate change crisis.

This is the next big competitive challenge for all car makers, as it will remake the entire industry. It will also revolutionize the future position of the major car makers that are fighting the competitive challenge.

The major car makers are in a race to produce the most accepted electric and hybrid automobiles to displace the existing gas-powered cars. The slow revolution in hybrid and electric models was disrupted this year by the success of Tesla to produce the electric car.

All the big players are competing to produce the successful car powered by electric engines or by hybrid technology. In this car race, price, efficiency and market savvy are likely to play an important role.

Up till 2010, only 14,260 electric cars are in operation. These are highly priced, largely experimental models. By 2017, there are already more than three million models on the road, with their price falling toward affordability in commercial terms.

My email is: [email protected]. For archives of previous Crossroads essays, go to: https://www.philstar.com/authors/1336383/gerardo-p-sicat. Visit this site for more information, feedback and commentary: http://econ.upd.edu.p h/gpsicat/