Europe’s Debt Crisis Seems Bad? Look at Its Car Industry

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Balint Porneczi / Bloomberg via Getty Images

The Peugeot 208 is seen on display at the company's headquarters in Paris, France.

Think the bleak news flowing from Europe’s debt crisis is depressing? Check out the region’s auto industry, whose tumbling sales and excess production capacities have many experts anticipating a spate of mass layoffs and plant closures in coming months. This week alone, France’s Peugeot PSA confirmed it will eliminate 8,000 jobs and close one Paris-region plant to stem rising losses. And that’s probably just the beginning of such cutting at the company — and across Europe’s wider automotive sector.

Just how bad are things in motoring Europe? On Wednesday Peugeot reported it lost over $993 million in the first half of 2012 alone. The same day, American maker Ford announced second quarter net income of just over $1 billion world-wide — but a $404 million loss in Europe, where the company now expects total losses to exceed $1 billion by year’s end. Meanwhile, General Motors Europe affiliate Opel-Vauxhall has lost a whopping $14 billion since the start of the century, and is almost certainly facing the same sort of layoffs and plant closures Peugeot has announced. And partners Chrysler and Fiat are also facing grim employment and production decisions to survive the sector’s tightening crisis.

What’s more, the sector is almost certain to see more bad news on the revenue front. According to the Brussels-based European Automobile Manufacturers’ Association (EAMA), new car registration declined by nearly 7% in the first half of the year. All told, projected total sales of 12.4 million cars in 2012 would represent a nearly 20% slide in volume over 2007, when the current string of annual shrinkage began. Forecasts that once saw activity improving by 2013 now push returning health in the sector beyond the recessionary horizon now stretching far off into the European distance.

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That dismal outlook on the demand side is compounded by concerns over excess supply. Industry analysts say auto manufacturers in Europe maintain around 30% more production capacity than the market will bear. As a result, even the handful of European car manufacturers still in the black, like French group Renault, are seeing profits plunge.

Unlike U.S. peers Ford and General Motors when they fought back from imminent doom in 2009, Europe’s auto companies can’t expect much government help. Indeed, over-indebted, cash-strapped European states that have repeatedly come to the aid of a car industry employing 2.3 million people now find themselves battling financial calamities of their own. Public money used in the past to avert bloodletting in one of Europe’s largest sectors has simply dried up. Evidence of that came Wednesday, with the new plan revealed by France’s Socialist-led government to assist Peugeot and Renault. Far from lavishing subsidies on the groups, the plan largely relies on previously budgeted funds redirected towards encouraging production and purchases of electric and hybrid cars. It’s hardly the kind of financing necessary to enable restructuring with minimal job losses.

Yet there are different hues of bleak across automotive Europe, where the health of individual carmakers tends to reflect the sturdiness of their respective domestic economies and direct exposure to the debt crisis. For example, car sales have continued rising modestly in Germany. Meanwhile, German car makers Volkswagen, BMW, and Daimler — whose own restructuring mirrored labor and fiscal reforms applied in recent years to Germany’s overall economy — have remained profitable despite contracting sales in other European markets. Not surprisingly, many observers expect looming restructuring moves by flailing car companies to involve joint ventures with stropping rivals—including a possible Peugeot partnership with BMW.

(MORE: Why the Eurozone Can’t Just Muddle Through)

But even those won’t allow troubled auto manufacturers from avoiding what some argue will be enormous and traumatic changes in the way they’re operating. Those observers say excess production capacities, over-staffing, too many scattered factories, and outdated industrial and sales strategies have to be remedied rapidly in order to respond to a shrinking and increasingly segmented market. There is no more time or money to be wasted any longer, they claim.

“I’ve never seen it this bad,” Sergio Marchionne, chief executive of Chrysler and Fiat told the New York Times in this excellent article on the plight of European car makers.  “All the unresolved issues that have been plaguing the industry for a number of years have all come forward.”

Yet Fiat, like most rivals, has yet to step up with the kind of grim remedial plans Peugeot announced. According to experts, that’s because companies in less critical condition are playing chicken in the hopes that sicker competitors will be forced into action first — and take all the political fire those advanced positions will come under. Peugeot, for example, came under ferocious pressure from France’s Socialist leaders to withdraw the layoff and closure plan. It’s similarly been told by outraged unions its restructuring “means war.” Yet despite the remarkable hostility and lobbying its reconstruction program unleashed, on Wednesday Peugeot said it was holding its ground as the only possible way to survive. Even some leftists reacted by acknowledging there isn’t much margin for maneuver anywhere these days.

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“It’s not up to us to say, ‘you must lower the number of layoffs to a certain number,” Socialist Labor Minister Michel Sapin said of its efforts to cajole Peugeot into reworking its restructuring plan.

That’s a realization and response likely to be echoed across Europe as more car companies take similar steps. The hard reality is that while curative measures will be bitter and tragic — and reaction to them possibly violent — there may be no option for many car companies to shuttering some factories now in order to avoid having to close them all before long.

4 comments
summer212
summer212

The declining sales of cars in the European market has been a matter of severe concern for a lot of people.Because of the decline in sales,most of the car manufacturers are experiencing heavy losses because of which they are being forced to shut down their plants in Europe.This has directly affected about thousands of employees who have been thrown out of employment.This could lead to a collapse in the GDP of a nation and eventually to the economy.Its not just car manufacturers who are getting affected.Europe has seen a decline in sales of most products as a result of which the recession has made its worst impact here.


http://www.orangemotors.net/

LoudRambler
LoudRambler

 ...yet GM did everything it could not to sell Opel to Magna.

 Smart, smart strategy...

Clyde Israel
Clyde Israel

Why the concern?  France is a member of the UN and by default are supporters of the "Green Economy", Agenda 21 and the likes.  The agenda is to reduce GHG emissions and foster an element of sustainability.  Do you not expect a contraction in the automotive industry?  Seriously, are you - the writer - not apprised of all the facts.  

Can you please write about opportunities automotive industries have in order to succeed in this modern world of SUSTAINABILITY?  Or how laid off employees have opportunity to thrive in other green endeavours.  This line of thought is more conducive to succeeding in these trying times as opposed to the misery mentioned above.

vstillwell
vstillwell

I think the creeping global depression has more to do with this than any "green economy" initiatives.