The Other Ticking Time Bomb in Europe - Auto Overcapacity
While Europe has been preoccupied with the euro crisis, another storm has been gathering that could also take a grievous toll on jobs and growth.
Just as Europe has too much debt, it also has more automobile factories than the economy can support. The overcapacity is not exactly a secret, but judging from the talk at the Geneva auto show this week, a long-postponed reckoning with the problem is nigh.
‚ÄúAll of the car manufacturers have capacity problems ‚ÄĒ all of them,‚ÄĚ Carlos Ghosn, head of the Nissan-Renault alliance, said in Geneva. The industry is just waiting for one company to make the first move, he said.
‚ÄúIf somebody restructures it‚Äôs going to force everybody to restructure,‚ÄĚ Mr. Ghosn said.
The government scrap programs that helped carry the industry through the downturn of 2009 and 2010 are not likely to be repeated. Hard-pressed governments are not in a position to subsidize unproductive plants as they may have in the past. Instead, the big question is how to manage the inevitable downsizing.
Sergio Marchionne, the chief executive of Chrysler and Fiat, repeated a call he had made earlier for the European Union to step in and help car companies ‚Äúdistribute the pain and suffering,‚ÄĚ the way it helped manage cuts in the steel industry in the 1990s. In Europe, any attempt to cut costs can quickly deteriorate into a political struggle between the countries that stand to lose jobs.
‚ÄúThat is the only way to do it,‚ÄĚ Mr. Marchionne said at the auto show. ‚ÄúThere has to be some production taken out.‚ÄĚ
Mr. Marchionne, who besides running two of the world‚Äôs biggest car companies is also president of the European Automobile Manufacturers‚Äô Association, estimated that the industry needed to cut capacity in Europe by 20 percent. That is a huge number considering that the car industry directly employs 2.3 million people in Europe, including subcontractors, according to the manufacturers‚Äô association.
Unused capacity is ruinous for car companies because even idle factories cost money to maintain, and unproductive workers must be paid. In addition, the oversupply of cars drives down prices. Mr. Marchionne said the glut of capacity had forced European carmakers into a ‚Äúdiscount binge‚ÄĚ similar to what occurred in the United States in 2007 and 2008.
‚ÄúYou can‚Äôt keep that up for long,‚ÄĚ Mr. Marchionne said. ‚ÄúYou‚Äôll go bankrupt.‚ÄĚ That is, in fact, what happened to Chrysler and General Motors.
Mr. Marchionne and Mr. Ghosn were reluctant to point fingers, but to analysts it is pretty obvious which companies are under the most pressure to confront overcapacity. They are G.M.‚Äôs Opel unit and PSA Peugeot Citro√ęn, both of which suffered huge losses last year.