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Weak Demand Will Force Europe Shakeout – Report

Europe Lags U.S. In Painful Action Needed
European Governments Stopped Needed Remedial Action

“industry players incorrectly assume that the next new product/portfolio will take share from competitors and alleviate fixed cost pressures”

Europe’s mass car manufacturers have produced too many vehicles for the weak market to bear for too long, and this may finally trigger the long predicted cut in capacity, according to industry consultancy Price Waterhouse Coopers (PWC).

In a report entitled “Day of reckoning for Europe’s auto sector?”, PWC’s Autofacts publication said, unlike U.S. companies which shuttered huge amounts of unwanted capacity particularly after the 2009 economic crisis, European governments were too frightened of the huge political importance of automotive manufacturing to allow necessary cuts.

Massive government “scrappage” incentive programmes allowed them to ride out the storm without taking painful action to reform.

“This dynamic (the U.S. auto industry’s resurgence) falls in sharp contrast to much of Europe as weak demand looks set to force capacity rationalisation,” the report said.

The report didn’t say which European companies needed to act. It is probably safe to assume it doesn’t mean the native Germans VW, Mercedes and BMW, given that these companies have made painful decisions to restructure. The German government also instituted supply side reforms starting in 2003, when Chancellor Gerhard Schroeder began to implement a program of long-term structural reform called “Agenda 2010.” The German companies are currently hugely profitable. Not so mass car makers like Peugeot-Citroen and Renault of France, Fiat of Italy, and the American transplants Opel-Vauxhall and Ford.

Standard & Poors said 2012 will be the fifth consecutive year of lower sales in Europe.

“The E.U. industry removed 1.2 million units (six per cent) of capacity between 2005 and 2012, where North America cut a dramatic 5.1 million units (27 per cent) via shift reductions and plant closures,” the report said.

“North America now appears better prepared to compete on a global stage. North America’s industry both domestic and foreign has the opportunity to respond to customer demand rather than reverting to the antiquated “push” method of maximising assembly to cover elevated fixed costs, which necessitates price discounts to manage inventory,” the report said.

The report said European Automotive Manufacturers Association (ACEA) data shows two million jobs directly and 10 million indirectly are dependent on the auto industry. Net exports contribute a positive trade balance of €57 billion a year. E.U. governments benefit from €414 billion annually in revenues from the auto sector.

“Consequently, Europe’s policy makers were loathe to jeopardise a critically important source of jobs and revenue. Excess capacity and by definition excess supply remains at the core of many of the structural and operational issues that Europe’s industry has faced, past and present,” according to the report.

Peugeot-Citroen, Renault need to act
Another report, from Deutsche Bank, points out in more detail the current examples of the problem. It says Peugeot-Citroen and Renault have been producing at a faster pace than the sales decline. While Fiat has cut its production by about 30 per cent as sales fell 18 per cent, Peugeot-Citroen has reduced its production only 10 per cent in face of a 17 per cent drop in sales, while Renault has cut output nine per cent as sales dropped 23 per cent. Deutsche Bank expects second quarter production cuts. The bank said German manufacturers VW, BMW and Daimler had cut their production to match the fall in European sales.

“The biggest production declines will naturally come from those who seemingly built the most inventory, namely Peugeot-Citroen and Renault,” Deutsche Bank said.

Autofacts said overcapacity in Europe hasn’t been helped by barriers to exit being much higher than other regions with inflexible labour laws and the presence of several “national champions”.

“Furthermore, it has been the case – not just in Europe – that industry players incorrectly assume that the next new product/portfolio will take share from competitors and alleviate fixed cost pressures,” Autofacts said.

Potential action to fix Europe’s problems has been thwarted by politicians because manufacturers have been unable to present a united front.

“The large number of European automakers has made it difficult to achieve a unified, persuasive position when lobbying, particularly at the E.U. Level, giving regulators in Europe greater control over the sector,” Autofacts said.

E.U. intervention
In April, Fiat-Chrysler CEO and current ACEA president Sergio Marchionne blamed German manufacturers for blocking his plan for E.U. help to fix the industry.

“The three German makers appear united against E.U. intervention. But no one can say that overcapacity is not a problem in Europe,” he was quoted as saying.

Earlier in March, Marchionne said the E.U. needed to get involved in a “painful” restructuring of the European auto industry including plant closures, because if left to national governments, nothing would happen.

At the Geneva Car Show in early March, Marchionne was joined by Peugeot of France, which talked about the need for an “industrial” policy” to help Europe’s inefficient manufacturers.

European overcapacity is said by many to be at least 20 per cent of total capacity while some say it is close to 35 per cent.

Renault-Nissan CEO Carlos Ghosn said at the Geneva show everybody knows drastic action and closures are called for.

“All have capacity problems. When one starts, the others will be forced to follow,” he said.


Neil Winton – May 1, 2012

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