Dark days ahead for European car manufacturing

ANALYSIS:As HG Wells might have put it, the great disillusionment has begun. Not invaders from Mars, but the massive and possibly irrevocable restructuring of the European car industry. Jobs are being shed and vast factories are being earmarked for closure as continental car makers desperately try to adjust to the harsh economic realities of the past four years.

Car sales in Europe are about to reach a 17-year low and that simple fact is about to cost an horrific number of people their jobs and Europe much of its skilled labour and manufacturing capacity.

To blame all of this on the current financial crisis would be to partly miss the point though. The key issue here is over-capacity; the fact that there are too many factories turning out too many cars for too few buyers, or at least with the capacity to do so. Factories running at less than around 80 per cent of their designed capacity are losing money, and many European plants are currently at 60 per cent or even lower.

This is not a new problem. It has bedeviled the European car industry for well over a decade now, but until 2008, there was always just enough vim and vigour in the market to allow car makers to paper over the cracks.

Not any more. PSA Peugeot Citroen has already announced one factory closure (Aulnay, near Paris) and around 10,000 job cuts (on top of cuts already made since 2008), while this past week, Ford announced that around 6,500 of its European jobs would have to go, including the closure of factories in Genk, Belgium, Southampton, UK, and part of the vast Dagenham plant near London. Fiat and Opel are both gearing up for further cuts and even Mercedes-Benz has embarked on a round of cost-cutting to shore up its profit margins. For those of us who remember the disappearance of Fiat from the Kylemore Road in Dublin, of Renault from Wexford and of Ford from Cork, history is repeating itself, but this time on a vast and more terrifying scale.

Deja vu

For those who worked in the sprawling US car industry in the 1970s in Detroit, all of this will have a familiar ring to it. Detroit, Motown itself, was once the bustling hub of GM, Ford and Chrysler in their full pomp. But three decades of oil crises, Reagan-omics, recession, dot-com-bubble, 9/11 and global financial meltdown has reduced the Big Three to shadows of their former selves, and Detroit itself is a virtual ghost town in places, and frequently a no-go area for the police.

“I don’t think that has to happen here, but certainly it’s a possibility,” says Dr Mia Grey, an economic geographer from Cambridge University.

“I think we need to look very carefully at the industry and at nourishing the industry and keeping it healthy. What that means often is really helping these firms pursue non-price competition, help them to compete on things other than price, to move upmarket if you will, in order to retain those jobs.

“That scenario that I laid out, the permanent shedding of skilled, well-paid jobs, is by no means likely, but at the same time we want to make sure that isn’t the path we take.”

It will be a difficult path to avoid though, as factory closures will result in layoffs not just for the car companies themselves, but also in their supplier chains and their surrounding communities. The economic ripples will spread far and wide.

Volume brands

“Some of these problems have their roots in ’09, and then there’s the trend of the premium brands moving into volume sectors,” says Mark Fulthorpe, automotive analyst with IHS Consulting. “They’ve essentially taken over the D-Segment and now they’re moving into sectors below that and that will continue to apply pressure to what we would traditionally have called the volume brands.

“As will the growth of the Koreans. Their capacity investments have been primarily made in central and eastern Europe, where the labour costs are much lower, so they’ll continue to enjoy that benefit, and continue putting pressure on factories in western Europe, where thanks to legacy issues, costs are much higher.”

It’s that Korean and premium pincer movement that is creating such problems for the “mainstream” car makers in Europe. Renault earlier this year even asked the French government to investigate what it perceived as illegal below-cost selling by Hyundai-Kia, a request that officialdom swiftly batted aside.

Other wild rumours and speculation that flew around in the course of 2012 so far were that GM might finally close down Opel entirely (in fact it seems more likely now to be merged with PSA Peugeot Citroen, with GM retaining a 30 per cent stake) or that Ford might withdraw entirely from loss-making Europe, to concentrate on its healthy US and other global markets.

Again, that seems unlikely, but the fact that such theories were being expounded by respectable outlets and experts gives an indication of the depth of despair surrounding European car making.

Amidst all the gloom though, there are some slivers of hope. Fiat, for one, and in spite of its own financial travails that has seen it dramatically slash both production and investment in Europe, thinks that recovery is eventually inevitable.

A spokesperson for Fiat CEO Sergio Marchionne said: “Yes, Fiat believes we will see a return to a complete market. People will continue to want and need vehicles, but it is a sizeable investment for which many people need financial assistance and security to feel comfortable.

“The challenge will not be finding customers, but finding the vehicles to satisfy their rapidly evolving tastes and expectations. Europe has a massive auto over-capacity issue. Most industry experts agree that 10 plants need to shut. In the US, this industrial restructuring was forced through by government in exchange for the bailouts but this will not happen in Europe.

“You will always have imbalances in global markets but being a truly global company, Fiat-Chrysler is able to ride out the current situations with its own resources. Chrysler has repaid all of the US and Canadian loans years ahead of schedule allowing the company the breathing room to weather the European storm for as long as it lasts.”

New markets

The fact is that, to survive, European makers will have to abandon their traditional middle-class markets, to an extent. Renault has already begun this process, by re-creating old Communist era Dacia as a funky affordable brand, and it’s currently trying to do the same thing with dear old Lada, as it also plans a move upmarket with a new Initiale Paris sub-brand.

Volkswagen, apparently untouchable for now, is carefully reading the economic tea leaves and is planning a Dacia rival brand of its own, to sit even below budget-friendly Skoda in the VW family. For the likes of Ford, Opel, and PSA Peugeot Citroen, the transition could be much more painful.

That said, Peter Collins, industry editor with the Economist, reminds us that for all the predictions we may make about the motor industry, no one has a crystal ball: “The wonderful thing about the motor industry, it seems to me, is its potential for surprises, so I think it would be unwise to say that anything is inevitable. Who would have thought, for example, that Fiat’s takeover of Chrysler would prove such a lifeline?

“Furthermore, car makers are not just any old manufacturers. In many countries, they – in particular their assembly plants – are regarded as symbols of national virility. So it is quite possible that if any of the big European car brands got into even deeper trouble, governments might step in (even though they hardly have money to burn right now). Peugeot-Citroen is an obvious example.

“If Ford or Peugeot or Opel/Vauxhall just happen to come up with a new product that takes off, like the Nissan Qashqai has, and/or BMW, Audi or Mercedes slip up with their next models, and if the European market starts to recover, it is possible to imagine brighter days for the volume car makers.”