Europe closer to biting auto overcapacity bullet

MILAN, March 2 Fri Mar 2, 2012 11:43am EST

MILAN, March 2 (Reuters) - Europe's car industry is edging closer to making painful and costly production cuts that industry executives acknowledge are the only way of nursing loss-making businesses back to health.

When the industry hit crisis in 2009, European carmakers largely put off the pain with the help from scrappage schemes and government loans in the hope economic recovery would erase the need for cuts. The recovery came, but was short-lived and carmakers are again facing a downturn.

That is in stark contrast to their counterparts in the United States, who delivered major capacity cuts in exchange for government bailouts.

The slimmed-down U.S. industry shed a total of 1.5 million units capacity from 2007-12, including the so-called "transplants" of U.S-based foreign carmakers.

The number of factories fell to 54 from 64, sending capacity utilization shooting to an expected 82 percent in 2012 from 66 percent in 2008, according to figures from IHS Automotive. Detroit's Big Three automakers closed 13 plants during that time.

In Europe, with 241 plants in 27 countries, just three factories have closed, or are slated to, in the same period. This leaves capacity utilization at an expected sluggish 65 percent this year, according to figures from IMC-Auto.

Carmakers need to run plants at about 80 percent capacity to break even, said Calum Macrae, PwC's lead automotive analyst.

TIPPING POINT

The European industry seems to be reaching a tipping point. A grinding price war in a withering market, combined with high overheads from excess manufacturing capacity, has forced General Motors and Peugeot into an alliance to share production, development, and purchasing costs.

On Friday, Peugeot CEO Philippe Varin acknowledged for the first time that the alliance will affect production plans from 2016, when Peugeot and GM are planning to begin assembling some vehicles on shared production lines.

"Our factories already assemble Peugeot and Citroen cars on the same lines," Varin said. "In the future PSA factories may also assemble GM cars, and vice-versa."

The overcapacity problem in Europe is region-wide, but national governments shirk from job losses on their own turf, so end up offering a financial lifeline that does little to solve the underlying mismatch between supply and demand.

In Europe, restructuring "is seen as a change, but not a positive change," said Wolfgang Schneider, vice president of Ford Europe for governmental and legal affairs. "Restructuring is job losses. Job losses. Job losses."

Severance pay to workers is costly in Europe. Unions justify it by saying an unemployed car worker in, say, Spain finds it a lot harder to move to a job in another country such as Slovakia, than his U.S. counterpart would to move from Detroit to another state.

Many laid-off car workers simply don't find new jobs, and entire regions suffer when families cut their spending, said Marinella Baltera, a union organizer at Italy's Fiom in Turin who has helped hundreds of laid-off auto supplier workers negotiate benefits in the past four years.

"My main job is to manage a disaster," she said, referring to Fiat's production cuts and their impact on the city.

EXCESS CAPACITY

According to the European Automobile Manufacturer's Association (ACEA), 13.1 million new cars sold last year in the European Union and this is expected to fall this year, for the fifth year in a row.

European car makers have an excess capacity of up to 4.4 million units, according to figures from PcW Autofacts 2012.

That's a lot of capacity. Most plants make, say, 250,000-300,000 cars a year running at full speed. Closing GM's Opel-Vauxhall plant at Bochum in Germany and Ellesmere Port in Britain, say, would only be a drop in the bucket.

Varin's statements, however, could indicate that some of the two automaker's emptier factories may be destined for closure.

GM's guarantee not to close Opel plants expires at the end of 2014, and Varin has said the future of Peugeot's Aulnay plant north of Paris is in doubt beyond that year.

Peugeot's plant in Madrid is also seen as vulnerable, as are GM's sites at Bochum, Ellesmere Port, and Zaragoza in Spain. Closing plants is expensive -- to shutter PSA's Spanish factory at Villaverde would cost about 309 million euros, broker Bernstein estimated in a research report published last month.

Politicians in Europe -- where economies are reeling from deep spending cuts in austerity budgets -- are already positioning themselves for the job cuts that seem increasingly likely.

"Governments regard part of their job as to create and protect employment so Britain and Germany will be fighting to keep their plants alive," said Paul Niewenhuis, director of the Center for Automotive Industry Research (CAR) at Cardiff University.

"Cars aren't like trainers - you can't make them all in China - and there is a view in the auto industry that cars need to be made close to where they are sold."

Britain's business secretary Vince Cable met GM Chief Executive Dan Akerson in New York on Wednesday to urge the company to spare its Vauxhall plant in Ellesmere Port, north- west England, as part of plans to cut costs across its European operations.

A source with knowledge of the talks said the UK minister pressed the business case for keeping production in Britain and raised the possibility of GM producing other products at the factory.

Fiat Chief Executive Sergio Marchionne has been lobbying for an EU-wide solution. But so far, a European version of U.S. President Barak Obama's automotive task force is nowhere to be seen.

"Europeans are 'European' as long as it works," said Ford's Schneider. "When there is a challenge, then you have a breakup tendency and the old national interest patterns start to emerge."