Monday, December 22, 2008

Over 21 lakh jobs lost in US since Dec 2007

More than 21 lakh individuals have become jobless in the US ever since the world's largest economy entered into recession last December, with more number of employers resorting to mass layoff actions.

The number of such layoffs -- where 50 or more people are handed pink slips by a single employer -- touched 20,712 in the last eleven months.

On a seasonally adjusted basis, the Bureau of Labour Statistics in a statement said, "From the start of the recession in December 2007 through November 2008, the total number of mass layoff events was 20,712, and the number of initial (jobless) claims was 21,08,743." The number of job losses due to mass layoff actions stood at 1,41,750 in December last year.

Meanwhile, the National Bureau for Economic Research, which dates the nation's economic cycles, has said that America officially entered into recession in December 2007.

In the wake of the worsening financial turmoil, companies worldwide are cutting jobs to cut down costs. So far in December, companies across the world have announced more than 1.20 lakh job cuts.

More than one-third of the layoffs happened in America, where unemployment touched a record high of 6.7 per cent.

Reflecting the worsening labor market scenario, the data showed that the number of mass layoff actions rose to 2,328 last month whereas the same stood at 2,140 in October.

In terms of job losses, the November figures reached 2,24,079, slightly lower than 2,32,468 in the same period a month ago.

"The number of mass layoff events in November increased by 188 from the prior month, while the number of associated initial claims decreased by 8,389," data available with the Bureau of Labor Statistics showed.

Saturday, December 20, 2008

Auto parts: 200,000 may lose job; 4,000 units face closure

India's auto component makers are facing one of the biggest crises ever. With the domestic market in the doldrums and the exports to the American market badly hit, many companies are on the verge of shutting down.

The entire supply chain of auto companies is bearing the brunt of the economic meltdown. From Tier-1 companies to small-scale units, all are facing a huge fall in demand, delayed payments and a stiff liquidity crunch.

"About 4,000 ancillary units are on the verge of closure and about 200,000 people will be affected by this crisis. Most companies have cut down the number of shifts, working days and are cutting down production. The US crisis has aggravated the problem," says Anil Bhardwaj, secretary general, Federation of Indian Micro, Small and Medium Enterprises (FISME).

The commercial vehicle segment is the worst hit by the crisis. Such crises are cyclical, and tend to recur every 5-6 years, but a calamity of this magnitude has put all companies in trouble. "Auto component makers are hit very badly. The original equipment manufacturers (OEMs) have not been able to sell stocks. Cash flow is getting hugely affected. Payments are getting delayed, affecting a lot of projects. The overall sentiment is negative," says Jayant Davar, vice president, Automotive Component Manufacturers Association (ACMA).

Domestic woes

It all started with the crisis in the auto industry. Car sales, which were booming, have now plunged. In the wake of the marked economic slowdown, there is a severe credit crunch. This has, in turn, slowed down demand for vehicles.

"Payments to vendors are getting delayed, loans for capacity expansion are not being sanctioned, and banks are refusing loans to auto companies that are supplying to companies like General Motors, Ford, etc. The removal of insurance cover for exporters too has severely hit the industry," Davar explains.

The Chennai-based Sundram Fasteners, which supplies radiators caps and fasteners to General Motors, says it is more worried about India than the United States. "Most of the auto companies have done very badly in 2008. The business in the second half of the year has been 50 per cent less than in the first half," says V G Jaganathan, president (finance), Sundram Fasteners.

The US impact

The auto crisis in the US has only worsened the situation. Auto component makers' exports to the Ford, GM and Chrysler were growing at 50-70 per cent. Out of this 35-40 per cent of the exports were to GM in North America. GM accounts for about $500 million of India's auto component exports.

Exports from Indian companies accounted for over $3 billion last year. "We were expecting a 20 per cent year-on-year growth. But this year, this has drastically fallen to about 6 per cent. November and December were the worst months for auto component makers," says Davar.

The auto sector is amongst the worst-hit industry sectors. Adding to their woes is the cancellation of credit insurance which protects manufacturers against payment defaults from buyers.

The Export Credit Guarantee Corporation has frozen issue of fresh credit risk insurance (CRI) cover to Indian component vendors of US auto giants. "Auto component makers are coping with the double whammy of the domestic market and the export market," says Bhardwaj.

Meanwhile, GM India is playing down the impact of the parent company going under. "GM North America is in crisis while GM Europe has flat growth. GM Latin America and Middle East, and GM Asia Pacific are doing well. GM has already sourced components woth $500 million from India and it will meet the target of $1 billion by 2010, as other markets still need components," says P Balendran, vice president (corporate affairs), GM India.

For companies like Sundram Fasteners, the crisis will have short-term impact. "GM accounts for about 2-3 per cent of the total business. We will continue to outsource products. In case, GM files for bankruptcy, payments will be delayed. Bankruptcy does not mean closure, it is restructuring," says V G Jaganathan.

Big trouble

Sandhar Technologies, a diversified auto parts maker that has plants in the Europe, has seen a fall in business by about 50 per cent.

"The topline growth for Sandhar Tech has grown to Rs 800 crore (Rs 8 billion) compared to Rs 640 crore (Rs 6.4 billion) last year. But the bottomline growth has been severely hit. Steps taken by the government -- like Cenvat cut -- are just nominal. There is no liquidity in the market. With high auto loan rates and a scary job market, the last thing on anyone's mind would be to buy a car," Davar, who is also the CEO and founder of Sandhar Technologies, laments.

Auto component companies employ about 400,000 people. The small and medium enterprises in India employ about 3.3 crore (33 million) people. Many of these SMEs are in the auto sector. A good majority of them have already lost their jobs and the sector is likely to see more job cuts.
"Though the jobs cuts are not apparent, a large number of people have already been asked to leave. "Many ancillary units which supply to these companies are also likely to be wiped out if the crisis continues," Davar says.

Commercial and passenger vehicle sales have fallen drastically. Unless sales go up, the market will continue to be sluggish, says carmakers. Most of the companies were half way through expanding their operations and building new capacities. It is now a huge burden on these companies as they have to bear the huge interest costs and the defaults in payments.

Help us!

Many banks have refused to offer credit to companies who are supplying to GM. They fear that in the event of a bankruptcy, their payments will also get stuck. Many companies established auto plants in India to enjoy the benefits of the excise cut exemption. They have already invested huge amounts into these plants.

ACMA has asked the government to intervene and help the industry. There should be more liquidity in the system. Many banks have pulled back credit to auto companies. The interest rates have to come down to push sales. Auto companies badly need the ECGC cover. The government should look into these issues.

Auto crisis & GM India

The crisis will not have any impact on GM's India operations. The company's plans are going on as per schedule. "We will go ahead with our plans with internal approval so the crisis in the US will not affect us in India. GM is the only auto company which has seen consistent growth despite a fall in sales in November," says Balendran.

Optimistic even during the crisis, he says that GM India performed better in 2008 than it did in 2007. "In 2006, we sold about 35,000 units; in 2007, we sold about 60,032 units, while in 2008, we have already sold 72,000 units. It has been a steady growth," he says.

GM has inaugurated the engine plant at Talegaon, with a capacity of 160,000 units. This plant is expected to be commissioned in the year 2010. GM India is likely to hire 500 employees at the plant. GM has also started the engine power train facility with a capacity of 140,000 units.

"We have already hired 1,000 people and we will be hiring 500 more. We have no plan to cut production or cut costs. The reason for GM's success in India is the product line up. Starting from Rs 2.99 lakh (Rs 299,000), we have cars for every segment. We will be launching the new Captiva in January, a sedan called Cruze mid next year, and a mini car in 2009. The upgrades programme will also continue as planned," Balendran adds.

Bleak future

How long will the crisis last? There are no definite answers to this.

"We are hoping the situation will improve slightly in the Jan-Mar quarter. But if the recession worsens, it will only be tougher for companies to get going," says Davar.

GM India believes the situation will take many months to improve. "The slowdown has gathered pace in the last 3 months. The market is very sluggish. Liquidity is certainly a problem and it will take months to recover," P Balendran says.

"About 25 per cent of all companies in the small and medium enterprises, have already become 'non-performing assests (NPAs).' As the crisis worsens, 50 per cent of SMEs in the auto sector will end up as NPAs," says Anil Bhardwaj.

The FISME has said that these trying times should be converted into an opportunity to create a lean and powerful economy with sustainable growth.

In its memorandum to the Prime Minister Manmohan Singh, the association has sought several relief measures, including a moratorium on repayment and the allowing of corporate debt restructuring for all unit.

The association has also demanded that wrking capital limits of enterprises must be enhanced liberally and specific steps be taken to ensure timely payment to Micro, Small and Medium Enterprises (MSMEs) against supplies made to corporates.

A big push is needed for exposing SMEs to exports. Currently, 0.5 per cent of SMEs are engaged in exports and yet contribute to about 50 per cent of the exports.

There is a critical need to look beyond Export Promotion Councils and leverage resources of private organisations and associations focusing SMEs, the FISME has said.

Congress agrees to bail-out of Ford, GM and Chrysler

Lawmakers on Capitol Hill this weekend agreed to a short-term bail-out of America’s three biggest carmakers to prevent an imminent collapse of the ailing industry.

The White House and Democrats in Congress are this weekend working on details of the package to provide about $15bn (£10bn) in loans to General Motors, Ford and Chrysler. The legislation is being crafted for the beleaguered industry, which has called for a government bailout as the global recession has led to plunging sales of cars.

House Speaker Nancy Pelosi said the House of Representatives would consider legislation next week to provide “short-term and limited assistance” to the industry, which will undergo “major restructuring.”

She said: “Congress will insist that any legislation include rigorous and ongoing oversight to guarantee that taxpayers are protected and that resources are directed to ensure the long-term viability and competitiveness.”

The short-term lifeline comes as the heads of the Detroit car manufacturers have this week faced two days of intense questioning by assorted politicians on Capitol Hill as they call on Congress for $34bn of loans to help them survive a severe economic downturn.

Although a rescue package is likely to be considerably smaller than this figure, politicians have recognised that the collapse of any one of the Big Three would have profound implications for an already damaged American economy.

The agreement to put together a bailout package came just hours after the government reported that employers slashed 533,000 jobs in November – representing the worst single month’s job loss in 34 years. The three carmakers together employ nearly 250,000 workers, and more than 730,000 others produce materials and parts for cars.

The focus of the short-term bridging loan is likely to be GM and Chrysler, which are most in need of immediate assistance. GM had said it needed $4bn before the end of this month, while Chrysler, which is understood to have hired Jones Day for restructuring and bankruptcy work, had wanted $7bn immediately. The Senate is scheduled to be in session next week.

A key breakthrough on the long-stalled bailout proposals is understood to have come when Ms Pelosi bowed to President George Bush’s demand that the aid come from a fund set aside for the production of environmentally friendlier cars. She, along with environmentalists, had instead wanted the administration to take money from the $700bn fund the government set aside for the financial industry.

Ms Pelosi said the billions of dollars that had been set aside to modernise plants to develop the green cars would be repaid “within a matter of weeks.”

Although the details of the legislation are still being thrashed out, it is understood that this could include the creation of a trustee or group of industry overseers to make sure the bailout funds were used by car manufacturers for their intended purpose. The funds are designed to last until March.

US Government bails out General Motors and Chrysler with $17bn loan

The US government has saved General Motors and Chrysler from imminent bankruptcy with a $17.4bn (£11.6bn) lifeline loan package in an unprecedented move that will pile pressure on the British government to follow suit.

President George W. Bush agreed to hand over the funds to the two companies after months of fraught negotiations over the future of the two companies and a week after politicians in the US Congress rejected a $14bn bail-out package.

The news will safeguard an estimated 3m jobs reliant on the car industry in the US, as well as 5,500 staff at General Motors' Vauxhall factories in Ellesmere Port and Luton.

GM and Chrysler, both based in the once-booming city of Detroit, Michiagn, had warned they would have run out of cash by the end of the year without assistance, putting hundreds of thousands of jobs directly at risk, and risking 3m job losses in the wider economy.

"In the midst of a financial crisis...allowing the U.S. auto industry to collapse is not a responsible course of action," said the US President, who is tapping the $700bn bank bail-out pot for the necessary funds.

He had been considering a form of bankruptcy for the pair, but decided against it as it was thought customers would be unwilling to buy cars from a bankrupt manufacturer.

President-elect Barack Obama said the funding should be used to reshape the American car industry, which has been in terminal decline for decades due to rising labour costs, uncompetitive product offerings and falling sales.

"The auto companies must not squander this chance to reform bad management practices and begin the long-term restructuring that is absolutely required to save this critical industry and the millions of American jobs that depend on it," he said.

Although the American deal helps to the future of Vauxhall, GM Europe said it was still seeking assistance from the UK Treasury "within days", with a spokesmen saying it continued "aggressive work" to "align the business with the significant downturn in the market".

The European arm of the company would likely have remained outside the collapse of GM in if it had gone into bankruptcy, but the European arm is still seeking a range of new measures, along with the rest of the British car industry, including tax deferrals and investment in new, more fuel-efficient technologies.

Unite joint general secretary Derek Simpson said that intervention must come within the next week. "What is being asked for from the Government is not a handout, not a gift, it is access to strategic funding for a sector that is key to our economy's global stature and one that will play a lead role in its emergence from this recession."

Monday, December 15, 2008

Property prices may fall by 30% next year

Experts say that developers are likely to focus on sub Rs 20 lakh (Rs 2 million) flats due to huge demand for such flats and the government's stimulus package for Rs 20 lakh home loans.

"Earlier, developers thought that there is latent demand for premium homes, but in the current slowdown, that perception has changed. There is always demand for Rs 500,000-Rs 15 lakh (1.5 million) homes and developers will look towards that," Maheshwari said.

Property prices in the key cities have more than doubled in the past few years helped by a boom in the stock market and a spurt in salaries of home buyers. The subsequent measures of the Reserve Bank of India to cool the overheated economy and a subprime crisis coupled with a credit crunch, has tempered growth prospects in the country hurting sales of property developers.

The benchmarket Sensitive index has dropped more than 60 per cent from the beginning of the year, eroding much of the investors' wealth and RBI has increased repo rates by 150 basis points till September this year to curb inflation.

''Many developers will come down on their asking rates after being saddled with unsold stock beyond their ability to hold on," added Anuj Puri, chairman and country head, Jones Lang LaSalle Meghraj.

To boost sales property developers have been forced to cut prices of real estate but buyers are still adopting a ''wait and watch'' stance as many feel that even the lower rates continue to be unaffordable.

Property prices in Gurgaon, Noida in the National Capital Region have fallen by 25-30 per cent while Mumbai's distant suburbs have seen 15-20 per cent drop in prices. Now property consultants foresee further price correction of 25-30 per cent in 2009.

"By the middle of 2009, developers will loose holding power and cut prices sharply. Cuts will follow big time after elections," said Ambar Maheshwari, director of DTZ, an investment advisory.

Experts say that developers are likely to focus on sub Rs 20 lakh (Rs 2 million) flats due to huge demand for such flats and the government's stimulus package for Rs 20 lakh home loans.

"Earlier, developers thought that there is latent demand for premium homes, but in the current slowdown, that perception has changed. There is always demand for Rs 500,000-Rs 15 lakh (1.5 million) homes and developers will look towards that," Maheshwari said.

Govt announces package to boost economy

The government on Sunday effected an across-the-board four per cent cut in CENVAT that will bring down prices of cars, cement, textiles and other goods as part of an economic stimulus package that also earmarks an additional Rs 20,000 crore (Rs 200 billion) for infrastructure, industry and export sectors.

In a virtual mini-budget that entails a revenue loss of Rs 8,700 crore (Rs 78 billion) in the next four months, the package seeks to revive the crucial housing, export, automobile, textiles and small and medium enterprises sector to counter the economic slow down caused by the global financial crisis and the recession in the West.

The Central Value Added Tax (CENVAT) on non-petroleum products would down to ten, eight and four per cent for different categories.

The package also contained full exemption from basic customs duty on industrial intermediate naphtha to give relief to power sector and withdrawal of export duty on iron ore fines while cutting down the levy on export of iron lumps from 15 per cent to 5 per cent.

The much-awaited package, set rolling by Prime Minister Manmohan Singh who is also the finance minister, targets power, exports, housing, auto, small and medium industries and infrastructure sectors through additional funding and guarantees that total an amount of over Rs 30,000 crore (Rs 300 billion). The 10-point package contains substantial incentives for the sectors hit by the slowdown, besides allowing India Infrastructure Finance Company Ltd to raise Rs 10,000 crore (Rs 100 billion) through tax free bonds by March as part of efforts to support Rs 100,000 crore (Rs 1,000 billion) programme in the high-way sector.

Unveiling the package, Planning Commission Deputy Chairman Montek Singh Ahluwalia said "the market forces would compel manufacturers in a competitive environment to bring down prices and pass on tax benefits to customers."

Cheering the package, India Inc said it would augur well and car companies led by market leader Maruti announced that they would cut prices. "It is a significant effort to stimulate expenditure in rural infrastructure areas," the industry said.

"The government has been concerned about the impact of the global financial crisis on the Indian economy and a number of steps have been taken to deal with this problem," an official statement said.

The steps taken by the Reserve Bank of India to pump in sufficient liquidity in the financial system are being "supplemented by fiscal measures designed to stimulate the economy. In recognition of the need for a fiscal stimulus the government had consciously allowed the fiscal deficit to expand beyond the originally targeted level."

"It's just a very good stimulus package, if you want one word for it," Planning Commission Deputy Chairman Montek Singh Ahluwalia told reporters while briefing on the package.

"Don't look for one number. Assigning one number is not the right way to look at it," said Ahluwalia, who said it was a significant effort to give a stimulus on expenditure side, especially on rural infrastructure and housing sectors which have the high employment potential.

As part of steps to create demand in the economy that is expected to grow by over 7 per cent, "the total spending programme in the balance four months of the current fiscal year, taking plan and non-plan expenditure together is expected to be Rs 300,000 crore (Rs 3,000 billion)."

The stimulus package announced on Sunday comes on the heels of RBI'S monetary measures to ease the cost of funding for the banks, signalling that lenders should lower their interest rates.
"The government has been concerned about the impact of the global financial crisis on the Indian economy and a number of steps have been taken to deal with this problem," an official statement said.

Having assured stability of the financial system, the government said it has focussed its attention on countering the impact of the global recession on India's economic growth.

"The economy will continue to need stimulus in 2009-2010 also and this can be achieved by ensuring a substantial increase in plan expenditure as part of the budget for next year," it added.

The measures also included the government departments being allowed to seek replacement of government vehicles within the allowed budget, in relaxation of extant economy instructions.

"The government is keeping a close watch on the evolving economic situation and will not hesitate to take any additional steps that may be needed to counter recessionary trends and maintain the pace of economic activity," it added.

Banks cut home loan rates

Public sector banks on Monday announced that home loans up to Rs 5 lakh (Rs 500,000) would be given at a maximum interest rate of 8.5 per cent, while those between Rs 5 lakh and Rs 20 lakh (Rs 500,000 and Rs 2 million) would be offered at 9.25 per cent.
Besides, the banks would not charge any processing fees and pre-payment charges for loans up to Rs 20 lakh, and would also provide free insurance cover, the Indian Banks Association said.
The package looks at reviving the demand in the housing industry.

  • Interest rates not to exceed 8.5% for loans up to Rs 5 lakh
  • Interest rates for loans between Rs 5 lakh and 20 lakh to be 9.25%.
  • No processing fee or pre-payment charges, free insurance cover for loans up to Rs 20 lakh.
  • PSU banks announce one percentage point cut in loans for micro, small and medium enterprises (MSMEs).
However, it is not yet clear if the existing home loan borrowers will benefit from the special home loan schemes unveiled by state-owned banks on Monday.

Outlining the new housing loan package in accordance with the stimulus package announced by the government on December 7, State Bank of India chairman O P Bhatt said the interest rate under the two schemes could come down, but would not go up beyond the threshold limit of 8.5 and 9.25 per cent for a five-year period.

The offering under the packages would be made till June 30, next year, Bhatt said, adding that after the lock-in period of five years the borrowers could look in for free or floating rates that could change in accordance with market conditions.

To make the package attractive, the public sector banks would give the loans at a margin of 10 per cent up to Rs 5 lakh and 15 per cent for loans between Rs 5 lakh and Rs 20 lakh, and in either case, banks would offer free insurance cover, Bhatt said.

Leading private lenders, including ICICI Bank and HDFC, appeared favourably inclined to cut their rates, with sources saying the two lenders would study the PSU banks' package before taking a call.

Sources said any decision would be taken after ascertaining whether PSU banks are getting any government subsidy for implementing the package.

The banks have also decided to cut the lending rates for the micro and medium enterprises by 100 basis points.

Gold surges on firming overseas trend

Gold prices surged by Rs 100 to Rs 13,000 per 10 gram on the bullion market here on stockists buying sparked by a firming trend in the international market.

Silver also rose by Rs 50 at Rs 17,000 per kg.

Buying activity picked up following reports that the precious metal in overseas market rose as weakening dollar against the euro raised demand for the gold as an alternate investment.

The dollar fell to seven-week low level against the euro. The rising price of crude oil was another supporting factor for the yellow metal.

Gold generally moves in opposite direction to the US currency, traders said, adding that surging crude oil raised concerns of inflation and boost demand for precious metal as a safe hedge.

Along with the general firm trend, silver ready rose by Rs 50 at Rs 17,000 per kg and weekly-based delivery by Rs 40 at Rs 17,120 per kg. Silver coins spurted by Rs 200 at Rs 26,600 for buying and Rs 26,700 for selling of 100 pieces.

Standard gold and ornaments gained Rs 100 each at Rs 13,000 and Rs 12,850 per 10 gram respectively. Sovereign was unchanged at Rs 10,500 per piece of eight gram.

Cheaper home loans may not cheer realty sector

The real estate sector is unlikely to see any movement even after measures like bringing Rs 20 lakh and below loans under the priority sector. However, it will trigger demand in the tier II and tier III cities.

Since the beginning of the year, realty prices have fallen by 10% to 15% across the country. Analysts expect a further price correction of 20% to 25% followed by a time correction. But real estate cost in metro cities like Delhi and Mumbai continue to be high. In September 2008, the rates prevailing in south Mumbai was higher than what it was in November. The September rates for the residential segment in Churchgate, Cuffe Parade and Colaba in (Rs/sqft) was 15,000-32,000; 15,000-35,000; 14,000-40,000 respectively. The November rates for the same areas have however fallen. In (Rs/sqft) the current rate in Churchgate is 15,000-30,000; Cuffe Parade and Colaba are12,000-30,000.

In Delhi a lot of areas have experienced a dip. During September, 2008 the rates in (Rs/sqft) in areas like Golf Links, Greater Kailash and South Extension were 6,000-10,000; 6,500-12,000; 7,000-12,000. Prices have dropped since then in all these areas. In (Rs/sqft) the current rate in Golf Links is 5,200-9,000; in Greater Kailash it is 4,500-9,000; in South Extension it is 4,500-10,000.

Though much activity is not expected in Mumbai and Delhi, suburbs like Thane, Virar, Vashai and Panvel will see movement in the housing sector. Similarly, while places in the heart of Delhi will not beaffected, places like Rohtak and Sonepat will feel an impact.

Even after the current decline in prices housing accommodation in metros are still on the higher end and beyond the purview of Rs 20 lakh loan. So even if home loans become cheaper in this category metro accommodation is unlikely to come within its gamut and hence spur demand here.

“In the tier II and tier III cities there may be an impact with Rs 20 lakh loans becoming cheaper, but it will hardly affect demand in the metros where prices continue to be steep,” said Hitesh Agarwal, head of research, Angel Broking. The reason for demand to pick up in these cities is that here most of the buyers are end-users and hence genuine buyers, whereas in major metros investors majorly drive the demand. For the demand to start picking up in metros a price cut for the properties is essential.

Currently the interest rate of the priority sector hovers around 9% to 10%. PSU banks are likely bring it down by 2% to 3%. Banks are even looking at waiving off processing fees and reducing money margins.

Developers also think a further reduction in home loans to 6% to 7% for the priority sector is going to trigger demand.

With banks being more apprehensive about lending to this sector and chances of PE deals happening in the near future being equally grim, industry experts feel that developers will have to be realistic about the situation and bring prices down to drive demand.

“The bubble has gone bust in this sector. There is a slowdown in the global economy. Realtors cannot expect to maintain profit margins of the boom era. They will have to cut prices and set realistic targets for the future,” Agarwal pointed out.

Monday, December 1, 2008

US in recession

A panel of the National Bureau of Economic Research says the U.S. economy fell into a recession last year.

The NBER says its group of academic economists who determine business cycles met and decided that the U.S. recession began in December 2007.

Many economists believe the current downturn will last until the middle of 2009 and will be the most severe slump since the 1981-82 recession.