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backEUROtalk May, 2012

Europe's Car Industry: If Plants Close, Then What?

Under the lights of the Geneva motor show in March, Europe's top auto executives boasted about the new features of their latest models and tried to out-hype their rivals. The next morning, in a hotel conference room just across the way from Geneva's convention center, the same executives all sat down to work out how to fix their huge overcapacity problem.

At a board meeting of the European automaker's lobby group ACEA, the bosses of Volkswagen, Daimler, BMW, Peugeot, Renault, Fiat and Opel decided it was time to discuss the elephant in the room: plant closures.

"Their fear was of an all-out price war," said a source who was briefed about the meeting but declined to be named. "The negative fallout from that would be terrible."

The hard truth is that after more than four years of falling demand and profits, Europe's carmakers have yet to restructure or consolidate. Many factories are running at partial capacity – analysts estimate automakers have cut some 3 million cars, or 20 percent, from their production lines – and still producers struggle to sell their wares.

At the Geneva meeting, ACEA President Sergio Marchionne pressed members to call on Brussels for political cover to start shutting down factories. "Closures should be co-ordinated at EU level," the Fiat and Chrysler boss told them, according to the person briefed on the meeting, to get around "a game of chicken" played by the producers where the first company to close plants would take the brunt of the cost and leave the rest to benefit.

A GAME OF CHICKEN
Europe's carmakers survived the initial economic downturn in 2009 by turning to national governments for help. Germany, France, Britain and other countries offered some 30 billion euros in financing and incentives to companies and car buyers to support an industry upon which 12 million families depend for their livelihoods. But there was a conspicuous lack of pressure for companies to restructure or merge: Governments battling the financial crisis did not want to have to deal with yet more job losses. In France the government explicitly awarded the money on the proviso that its automakers did not shut any plants.

In contrast, U.S. carmakers were forced to overhaul their businesses in return for their massive $81 billion bailout, when Chrysler and General Motors were supported through bankruptcy.

But where the American industry has rebounded strongly, Europe's carmakers muddle on. Some, such as German firms BMW, Mercedes-Benz and Volkswagen, have enjoyed big profits on the back of demand for premium models. Others – Peugeot, Fiat and GM's Opel – have struggled. Many rely heavily on discounting, continuing to fund price cuts set up initially as government cash incentives for new buyers. Rebates in Germany and Italy reached an all-time high in March of 30 percent off the sticker price.

Automakers contacted by Reuters declined to give details about current capacity levels at their plants. In a May 1 report entitled "Can the EU ignore industry calls for help?" UBS published some estimates based on data from market research firm IHS and concluded that BMW and VW are running their plants at over 90 percent of capacity, while Renault is at an estimated 76 percent, followed by GM and Peugeot at 75 percent. Ford is at 70 percent and Fiat at 65 percent. Those rates are "barely at breakeven level at the top end of that range, and squarely in loss for a number of them," the report says.

So it is no surprise that many in the industry have concluded that the solution is to close some of the 187 vehicle factories in the EU, Russia and Turkey. The problem is, not everyone agrees. At the ACEA meeting Marchionne's argument was fiercely opposed by the three German manufacturers, whose brands continue to sell well.

To read entire article, please click here.

Source: The Fiscal Times - GAI

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