Fight for survival in Europe
Plant closures likely as carmakers scramble to stop losses amid prolonged sales slump
Photo credit: BLOOMBERG
PARIS -- With Europe in the midst of a five-year sales slump that is not forecast to end until 2015 at the earliest, automakers are taking dramatic steps to stop bleeding cash. This has put thousands of jobs and nearly a half dozen plants at risk, but that is the price some automakers will have to pay if they want to survive.
How serious is the threat? Serious enough for top-ranking executives to publicly state their concerns on whether all of today's competitors in Europe will be alive in the future.
"It is unclear if all carmakers will survive without government help," Volkswagen Group CFO Hans Dieter Poetsch said last month. "Carmakers in southern Europe that produce small cars will be especially affected."
Renault-Nissan CEO Carlos Ghosn said he is sure Europe will rebound but that some automakers will not be around once the tough times have passed. Separately, Ghosn warned that Renault would need to close a plant -- or plants -- in France if the country does not become more globally competitive.
General Motors and PSA Peugeot Citroen are considering combining GM's money-losing Opel/Vauxhall unit with PSA's automotive operations in a joint venture, according to media reports. The proposal shows how the slumping European car market is likely to reshape the region's auto industry.
PSA announced earlier this year it will shut down a factory near Paris in 2014 and will cut its work force at a second French plant. Opel does not expect to continue output at its plant in Bochum, Germany, beyond 2016.
Ford is "most likely" to close its assembly plant in Genk, Belgium, Colin Langan, an analyst at UBS Investment Research, wrote in a Sept. 17 report. Shutting the Genk plant would result in potential annual savings of about $500 million and may be completed by the end of 2013, he wrote. Ford of Europe communications director John Gardiner said the company would not comment on Genk's future. He said Ford "will continue to implement our plan to match production to demand."
Italian unions fear that Fiat's 500 million euro ($646 million) cut in new product investment leaves Italian plants in Cassino and Melfi vulnerable to closure. Both factories are producing at under 50 percent capacity.
Through September, car sales in western Europe dropped 7.7 percent to 9.1 million, according to LMC Automotive. September was the 12th straight monthly decrease. LMC forecasts full-year sales will fall 7.7 percent to 11.83 million units, almost 3 million units below Western Europe's peak of 14.8 million in 2007.
LMC doesn't see western European car sales reaching the 2007 level again before 2019 while consultants at AlixPartners say the European auto market won't return to pre-crisis levels until the end of the decade.
No coordinated response
About 40 car plants in Europe last year were running below their financial break-even point of 75 to 80 percent capacity use, AlixPartners estimates. The consultants say the 40 plants would need to build an additional 1.4 million units a year to break even.
Morgan Stanley analyst Adam Jonas said, "Europe is currently burdened by nearly 30 percent excess capacity, roughly equivalent to 15 assembly plants."
With no recovery in sight, more plants are likely to join the list of factories closed this decade that already includes Opel's plant in Antwerp, Belgium (2010); Saab's factory in Trollhattan, Sweden (2011); and Fiat's plant in Termini Imerese, Italy (2011).
Jonas said a further deterioration in car demand in 2013 could be enough to force European automakers and political and labor leaders to address as much as half of this excess.
Fiat-Chrysler CEO Sergio Marchionne has been pushing for that type of coordinated effort for more than a year, but his latest attempt, at the Paris auto show on Sept. 28, failed. After European automotive chiefs held a meeting on the sidelines of the show, Marchionne said: "There was an agreement that all the member companies would discuss and resolve [the overcapacity] issue on their own, as there is no common position on the matter at ACEA." Marchionne is chairman of ACEA, the European auto industry association.
He believes that even if ACEA members decided to address overcapacity on their own, the industry must still address excess production.
"I am concerned that if we don't find a collective will to resolve this at a European level, this is going to become a permanent crisis," he said in Brussels on Oct. 10.
Automakers in Europe have enough factory capacity to build 18 million passenger cars and light commercial vehicles a year, but sales are running at less than a 12 million annual rate. This is leading to an escalating price war that is putting profits under growing pressure.
"We keep on fighting with the same competitors, we all drink from the same trough and resources are limited," Marchionne said.
Ghosn: We’re on our own.
'Zero chance' of restructuring
Ghosn, however, sees "zero chance" of a government-led restructuring of Europe's auto industry similar to the restructuring in the United States in 2009, spurred by the bankruptcies of General Motors and Chrysler.
"Every company is going to have to deal with its own problems," Ghosn told Reuters at the Paris show.
Morgan Stanley's Jonas said PSA, Fiat, Renault, Opel and Ford should be leading the way in reducing capacity, but he added: "We are unlikely to see a sweeping exodus of capacity like the U.S. experienced in 2008 and 2009."
Europe's mass-market automakers are already taking steps to address overproduction.
This month, PSA and Fiat announced further temporary closures at some of their plants to cope with weak European demand.
PSA said it will stop production at its plant in Trnava in Slovakia, which builds the Peugeot 208 and Citroen C3 Picasso subcompact models, for 21 days in the fourth quarter. The company already shut down production in Trnava for 12 days this year.
Fiat stopped production at its plant in Pomigliano, Italy, for two more weeks at the end of October. Fiat has placed workers at Pomigliano, Italy, where it makes the Panda, Europe's best-selling minicar, on temporary layoff until Nov. 9.
Opel introduced a four-day workweek at its Ruesselsheim, Germany, plant, which builds the Insignia mid-sized model. Renault will halve the daily output of Twingo minicars at its factory in Novo Mesto, Slovenia.
Volkswagen also has cut its internal 2012 sales target for western Europe. "The VW Group is tentatively selling more cars this year than last year. But it is correct that it will be somewhat less than what was originally planned," Bernd Osterloh told German business newspaper Handelsblatt this month. "We are talking, however, of a maximum of 140,000 cars."
These are the latest temporary closures and sales-target adjustments that European automakers are applying to balance inventories in a slowing market, but with a recovery at least some years ahead, more radical restructuring may follow.
"Said Volkswagen Group sales boss Christian Klingler: "We're bracing for more negative surprises in 2013, perhaps also in 2014."
Bloomberg and Reuters contributed to this report
You can reach Luca Ciferri at firstname.lastname@example.org.