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Ford Europe Says Overcapacity Still Blights Industry

But Governments Unlikely To Act, Fearing Political Ramifications

“excessive discounting only devalues brands and helps weaken the entire industry in the longer run”

BILBAO, Spain – The European car industry’s chronic overcapacity, far from being addressed, has worsened since the onset of the recession, according to John Fleming, Chairman and CEO of Ford Europe.

Fleming didn’t think the problem would be cured any time soon because governments were fearful of the political consequences.

Fleming also called on the E.U to make sure the regulatory burden here didn’t hand an advantage to foreign competition.

“There is huge overcapacity and it hasn’t improved since the downturn. It was about 35 per cent and if anything it has increased since the recession,” Fleming told the Automotive News Congress.

“Overcapacity is a prime factor in fuelling the current heavy and aggressive discounting we are seeing in the market. This is not a sustainable way to run the industry. We must remember that we need to take action not just to improve our efficiency as far as the European market is concerned but to hone our competitive edge in the face of growing international competition,” he said.

The ending of government scrapping subsidies has led to a reemergence of price slashing and discounting as sales slipped.

“The tactic of excessive discounting is a short-term measure that only devalues brands and helps weaken the entire industry in the longer run,” Fleming said.

Match demand
He said the right way to deal with overcapacity is by reducing production to better match customer demand.

“Many of us are already on this path to improved efficiency by reducing significant overcapacity in our businesses,” Fleming said. “But as an industry, the rest have to catch up.”

Fleming said government assistance during the worst months of the recession saved the industry.

“Government help has been hugely significant in relieving pressure,” he said.

The European Investment Bank was useful because regular banking had dried up, according to Fleming.

Fleming didn’t think this help was anti-competitive, but some countries had overstepped the mark. He didn’t name names, but France last year provided 6.5 billion euros in loans to Peugeot-Citroen and Renault, on condition they didn’t move any production out of France.

“Scrappage schemes added some 2.5 million units in 2009. Without that the market would have collapsed, along with suppliers and dealers,” Fleming said.

Ford’s market share in its main 19 European markets in May was 8.2 percent, 0.7 percentage points down on May 2009. Despite this decline in volume, Ford said it remained number two in Europe so far this year after Volkswagen. Ford sold 598,400 new cars in the first five months, down less than one percent on the year before. The little Fiesta continued to be Ford of Europe’s top-selling new car, with 204,000 sold through May.

Fleming said he was sticking with Ford’s forecast of a 14 to 15 million sales in the in the 27 EU member states plus the EFTA countries in 2010.

“My sense is we’re going to see the market continue to weaken, probably still within a 14-15 million unit range,” said Fleming.
Last year, car sales reached 14.48 million. Many scrapping schemes have now ended or are being phased out, and this is offsetting the positive effects of underlying economic recovery.
Ford should close the sale of its Swedish Volvo car unit to China’s Geely in the third quarter, Fleming said.

Like GM Europe chief Nick Reilly in a previous speech, Fleming appealed to the European Union to make sure that regulations didn’t impose heavier burdens on Europeans than their foreign competitors in areas like fuel consumption, and wanted an effort to make the single market work better.

“The E.U. should support economic not political union,” he said.

 Neil Winton – July 1, 2010

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