The Nightmare of the European Auto Industry

Europe with its relatively affluent population of 500 million has turned into a nightmare for the auto industry. And the R-word—restructuring—unpalatable and almost illegal as it is in Europe, is being bandied about, this time by Fiat-Chrysler CEO Sergio Marchionne, who, as President of the European Automobile Manufacturers’ Association, spoke for all EU automakers. It was a dire warning and a cry for help.

“Horrible” was how he described the plight of the auto industry when he spoke at the European Business Conference in Bruges, Belgium, on March 20. He predicted that auto sales would sag by 5% in 2012, the fifth down year in a row. He didn’t see a recovery before 2014. All-time-high gas prices are part of the reason.

Perhaps Marchionne was fear mongering: his message was addressed to the EU Commission. The auto industry would have to restructure profoundly, and the Commission should take steps to allow and encourage it, he said.

New car registrations in February fell 9.7% across the EU compared to last year, worse even than February 2009 at the trough of the financial crisis. It was the fifth down month in a row. The results would have been even worse had it not been for an extra selling day.

For January and February, registrations were down 8.3%. Some bright spots were tucked away at the fringes of the EU—Estonia was up 21.2%, Hungary 31.8%, and Rumania 54%—but among the largest markets, only Germany scraped by with a decline of 0.2%. Number two France and number three Italy plunged 20.5% and 17.8% respectively. Among smaller markets, Portugal swooned 47.9%. And in Greece, where hardly anything is sold anymore, only 3,827 new vehicles were sold in February, down 45.2% from the already traumatized level last year.

Marchionne’s cry for help wasn’t just about saving Fiat whose EU sales dropped 16.7% so far this year. The whole industry would have to cut capacity by 20%, or 3 million units, shutter ten or so plants, and massively lay off workers. But that is precisely what you can’t do in the EU.

PSA Peugeot Citroën, whose February sales plunged 16.8%, re-announced at the Geneva auto show that it would solve its overcapacity over the next two years. But layoffs and plant closings become highly politicized. French Labor Minister Xavier Bertrand issued a stern warning to PSA CEO Philippe Varin when word of talks with GM leaked out: layoffs as part of the alliance would be out of the question. In November, President Nicolas Sarkozy summoned Varin and told him  to reconsider laying off 6,800 workers. Layoffs will be even tougher to implement if socialist François Hollande wins the election.

Whatever their thinking was at the time, GM and PSA are now saying that Opel and PSA would each deal with its own overcapacity, and that plant closings weren’t part of the alliance, which would focus on saving money elsewhere. Chancellor Angela Merkel got personally involved in protecting Opel factories during the financial crisis and brokered the sale of Opel to keep GM from shutting it down. The deal fell apart, but the restructuring agreement survived and prevents GM from closing any plants until 2014.

Individual countries prevent layoffs, Marchionne said and added that the French government bailed out its automakers on condition that they wouldn’t close any factories, whereas in the US, the opposite happened: the government pushed GM and Chrysler to restructure during their bankruptcies as part of the bailout. So he appealed directly to the EU Commission to liberalize labor markets because individual countries wouldn’t do it.

Overcapacity pushes prices down, he said, and “that’s why almost no one is making money in Europe.” Alas, VW, BMW, and Daimler are basking in last year’s record worldwide sales and profits. Even in Europe they weren’t faring too badly, with Daimler up so far this year and VW and BMW down a smidgen. Clearly, the situation is “horrible” for European automakers, but there are those that can get through it and those that can’t. And those that can’t—Fiat, PSA, Renault, Opel, and Ford—will have to restructure… or get bailed out again.

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