Wave Of Consolidation Predicted, But Not Just Yet
“(restructuring) is absolutely essential if automotive companies want to achieve lasting stability and avoid future crises”
BILBAO, Spain – Everybody agrees that Europe’s car industry needs to dump unprofitable and excessive capacity.
Everybody also agrees that nothing will be done. The political price is simply too high.
The trouble is that as carmakers scramble to slash prices and offer tempting incentives to stay alive in weak markets, the whole industry suffers. The healthy, brave, and forward-looking are sucked into the same scenario.
“The most efficient are being brought down by the inefficient exerting huge price pressures,” said Arndt Ellinghorst, auto analyst with investment bank Credit Suisse.
Ellinghorst, addressing the Automotive News Congress, said there hadn’t been a big corporate crash in Europe, yet, while sales in the European market hadn’t slumped yet. He left the impression that the day of reckoning can’t be delayed indefinitely.
Other speakers at the conference also pointed to Europe’s massive overcapacity.
Ford of Europe Chairman and CEO John Fleming said European overcapacity was about 35 per cent before the recession and had worsened since.
Ernst and Young automotive analyst John Auldridge said Europe hadn’t closed one single plant and not closed down one single brand, in contrast to the action taken by General Motors and Chrysler in the U.S.
Wave of consolidation
A recent report by Alix Partners said that this lack of action cannot be postponed for ever and forecast that Europe faced a wave of consolidation, although it didn’t nominate any candidates for the chop. Half of Europe’s suppliers are in financial difficulty, more than twice the number that faced financial stress in 2008.
“Only seven percent of European suppliers can be described as financially healthy,” the report said.
“The underlying problem of dealing with chronic overcapacity in the European industry has yet be to rooted out, meaning there will still be more pain to suffer before the sector can start to emerge from intensive care. In contrast with the U.S., European car volumes are not going to recover significantly in 2010, which is therefore going to be a year of transition,” said Stefano Aversa President of Alix Partners European operation.
Europe car manufacturers were kept afloat by generous cash for clunkers subsidies, putting off the day of reckoning. The U.S. market suffered severely, when sales dived to 12.7 million in 2009 from 18.9 million in 2007, but American manufacturers are now benefiting.
“Massive and extensive restructuring has successfully transformed the automotive industry in this region – in contrast to Europe. American suppliers are generating profits on par with 2007 figures with an average EBIT of around six per cent in the first quarter of 2010, despite the fact that they produce far less than before the crisis,” the report said.
Europe must do something similar if it is to regain its health.
“The automotive industry in the U.S. has completed a successful transformation. Production volumes were adjusted to make the companies profitable again. The European automotive industry has managed to get through the crisis with the “cash for clunkers” programme and by increasing short-term liquidity, but has failed to solve the structural issues. The European automotive industry is in need of a major consolidation. This is absolutely essential if automotive companies want to achieve lasting stability and avoid future crises,” the report said.
But Credit Suisse’s Ellinghorst doesn’t think this will inspire any action because governments won’t let it happen.
“The automotive industry is important for jobs, particularly in Germany and the government will always protect them. Who is going to play hardball? You would just not be re-elected as a politician,” Ellinghorst said.
Eight to 12 big plants
Ellinghorst agreed with Ford Europe’s Fleming that overcapacity was up to 35 per cent, and reckoned that this amounted to the ability to make four million more cars a year than the market could support. It implied that there were eight to 12 big plants too many in Europe.
There was some good news around though.
Although Alix Partners said the sales slump will continue in Western Europe in 2010, but annual sales will recover to 16.4 million by 2014, a 10 per cent increase over five years.
Neil Winton – July 1, 2010