By on June 29, 2012

A report by Alix Partners, an automotive consulting firm, spells out what we at TTAC have been saying for some time; Europe’s auto industry is facing a major crisis of overcapacity, but no steps have been taken to remedy the matter.

 the consulting firm estimates that there are 26 million units of excess capacity, or the equivalent of 40 assembly plants.

To make matters worse, only three plants have been closed in the last four years, while new facilities in Russia other Eastern European companies have popped up. In that same time-frame, American automakers closed 18 factories as they underwent their own crisis.

Europe’s market has shifted drastically in the last two decades; low-cost cars have gone from being the smallest market segment to the largest, while gains in the premium sector have also helped put a squeeze on the middle from the other side. Of the 10 major automakers in Europe, the 5 who are operating below 75 percent capacity (which ensures profitability) are all mainstream automakers. The other 5 who are operating over that threshold all have strong premium brands, whose wares are being snapped up by eager customers all over the world.

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26 Comments on “Overcapacity In Europe: It’s Worse Than We Thought...”


  • avatar
    Viquitor

    This Alix Partners firm is owned by CVC Capital, aka Mr. Bernie Ecclestone.

    http://dealbook.nytimes.com/2012/04/24/cvc-clinches-deal-for-alixpartners/

    I can only but wonder…

    • 0 avatar
      pgreenberg

      CVC Partners is the former Citibank Venture Capital. They mostly do leveraged buyouts of existing firms. One of their private equity funds purchased the F1 business from Mr. Ecclestone. He does not run nor own CVC (the management company) http://www.cvc.com

      I deal with Alix partners and I highly doubt CVC’s investment in F1 has anything to do with the obvious truth that there is much overcapacity in Europe. Even the S. European auto manufacturers were trying to get everyone to close capacity, not just the poor performing manufacturers.

      • 0 avatar
        Viquitor

        Well… I’ll let the press to the talking:
        http://www.telegraph.co.uk/finance/financial-crime/9360292/German-banker-Gerhard-Gribkowsky-who-took-bribes-over-F1-sale-jailed.html

        Anyway, the “obvious” truth is not always Mr. Ecclestone’s truth.

  • avatar
    Pan

    And, we are all surprised? This has been growing more obvious for years. As more Asian countries start production — and exporting, the American and European producers of non perceived value cars like BMW, etc.will be out of business. G.M., of course, will be bought out by the Chinese.

    • 0 avatar
      Toucan

      Asians have irrelevant market share in Europe. Chinese have none.


      I asked a couple of days ago how is it possible to sell millions of cars and still make no profit. Got a meaningless answer: low revenue per unit. That’s the reason, not cause.

      This, however, explains a bit where the profits get sunk. Add in ruthlessly inefficient and pointless from the start processes typical for most large corporations and we have the answer. Minority of the employees of these carmakers produces value. Majority eats up profits made of this value.

      • 0 avatar
        Chicago Dude

        Asian production is perfectly relevant to Europe. How many of the 40 unneeded factories built cars for export?

      • 0 avatar
        Pch101

        “Got a meaningless answer: low revenue per unit. That’s the reason, not cause.”

        Er, that is the cause.

        Profit = Revenue – Expenses. Less revenue on similar expenses –> Losses or reduced profits. If VAG can sell Golfs at higher prices and in larger quantities than Opel can sell its equivalent, then guess who’s going to have a problem.

      • 0 avatar
        Toucan

        > If VAG can sell Golfs at higher prices and in larger quantities
        > than Opel can sell its equivalent, then guess who’s going to
        > have a problem.

        All three largest makers sell around 8 millions, key followers hang on at 6 or 5. Fluctuations are only local. And to sell more you usually need more models/versions. So it is not the number that really matters.

        Neither is price in volume/value models. Value customers are not stupid, if a Golf sells for more than Astra it is because it’s been more expensive to make (DSG + DI + turbo + nice interior costs more than old slushbox + PI + NA + worse interior).

        And yet some makers make tons of $$$ while others are barely even and another ones go bust.

        I believe the “expenses” part of the equation is at play:
        - not running overcapacity (see above)
        - keeping unions in check
        - sharing as much as possible
        - eliminating nonsense internal company processes
        - as few engines as possible
        - engine variety achieved by different states of tune
        - keeping engine designs long with minor updates to stay competitive (see Audi 4.2 V8)
        - … many others

        These are, among many others, key factors that separate profitable car makers from eternal loosers.

      • 0 avatar
        th009

        Customers really don’t care (or know!) what it costs to build a car, they care about the (perceived) value of what they are buying. If VW can make Golf Mk7 more attractive yet build it at a lower cost, they will reap increased profits from that model.

      • 0 avatar
        Toucan

        > Customers really don’t care (or know!) what it costs to build a
        > car, they care about the (perceived) value of what they are
        > buying.

        In 99% of cases perceived value also costs more to manufacture.

        When people explain their purchases, they often mention “better ride, more stable ride, nicer interior, more space (packaging), better looks/styling, more power in low revs, smoother gearbox, etc etc”.

        These traits usually come with higher upfront costs at the car maker.

      • 0 avatar
        Pch101

        In 2011, GM Europe sold 1.735 million vehicles with revenues of about $26.757 billion.

        In 2011, VAG sold in Europe 3,678 million vehicles with revenues of about 83.8 billion euro.

        For every $1 that GM gets for selling a car, VAG is collecting something close to $2.

        GM has similar problems in Europe that it had in the US — tarnished branding, which results in reduced demand and lower prices. The way to fix the overcapacity problem is to use those factories to make cars that people want to buy, and to get those buyers to pay relatively high prices.

  • avatar
    th009

    Need to do a sanity check before posting numbers like this. Total European auto production last year was roughly 20 million units; I very much doubt that there were another 26 million capacity and the industry was running at just 40% utilization. Maybe 26 million is the TOTAL capacity?

    In fact PwC estimated the overcapacity at 4.4M units just a few months ago:
    http://www.reuters.com/article/2012/03/02/europe-autos-idUSL5E8E22TV20120302

    It’s a problem for the likes of Ford, GM, Fiat, PSA and Renault, for sure, but it’s not as massive as the (poorly-fact-checked) Forbes article makes it look like.

    • 0 avatar

      Agreed.

      Sour grapes?

      Anywaya, there’s a problem. Can Fiat get their s+++ up? Can they sell to Europeans? If not, there’s q whole 3rdmarket, waiting for you. Brands mean something down here. Keep a nominal presence in Europe. Sell here, that’s what Fiat has been doing over the last 20 yrs…

    • 0 avatar
      th009

      Here is a chart with the actual AlixPartners data, from FT. Pox on Forbes for doing a sloppy job of publishing the numbers.

      http://www.ft.com/intl/cms/s/3/e85534d0-c122-11e1-853f-00144feabdc0.html

    • 0 avatar

      Indeed, the numbers are seriously whacked. However, from reading both the Forbes article and the Alix Partners press release, it appears that it is Forbes that is severely out to lunch when it says that “that there are 26 million units of excess capacity,” Alix Partners did not say that, at least not in its press release.

      Author Micheline Maynard is Forbes’ in-house specialist on the auto industry, and she should know off her blonde head that total worldwide production in 2011 was around 80 million.

      Using OICA data for 2011, motor vehicle production in the EU member states stood at 16.98 million units by the end of 2011, only slightly up from the 16.9 million units that were made in 2010 according to the ACEA 2011 pocket guide. Both associations should be taken as the definitive word in motor vehicle production statistics. The guides do not specify total production capacity. AFAIK, there is no exact count.

      The TOTAL current capacity of the automotive industry I the EU is estimated to be slightly above 20 million. The current overcapacity in the EU is, depending who you ask, estimated as between 4.5 and 5.5 million units annually. That’s not 26 million, but still a lot. Our yardstick always was that anything below 80% utilization is trouble.

      If the total industry runs at 75% utilization, then there will always be companies with numbers that are better, and companies with numbers that are worse. The companies in trouble are Fiat, PSA, Opel, Renault.

  • avatar
    Secret Hi5

    Ford stock price plunging 5 percent today when the DOW is up almost 2%. Ford made aftermarket announcement yesterday–Very bad news out of Europe . . .

    GM also down, but “only” by 1 percent.

  • avatar
    Dimwit

    This shouldn’t be a surprise to anyone. PSA, Renault and Opel are seriously hurting. If a couple of banks go tits up in Spain I can see VW shutting down SEAT because the Spanish economy has gone into a hole.
    FIAT has threatened to remove all small car production out of Italy. It would be ironic that the only version of the iconic 500 would come from Mexico. Only Ford will be able to hold just because they don’t have much flexibility. Either they’re producing or out of the market.
    It will be interesting to see who survives the coming year. Make no bones about it. This is for all the marbles. I’m certainly not putting my money on Opel!

    • 0 avatar

      nah, Renault ain’t so bad. Neither is Fors. All bets off on Fiat, PSA twins. Sad, sad day if all this carnage comes about

    • 0 avatar
      th009

      SEAT just introduced the new Toledo — less style than is expected of SEAT, but very much value-focused (like the current Jetta) for the struggling Spanish marketplace. Not really aligned with SEAT’s brand identity, but it’s an opportunistic move to build market share in a declining market (and, yes, keep the brand alive).

  • avatar
    el scotto

    Uh, the European Union is cratering? Nervous people don’t go out and buy shiny new cars.My apologies to our European readers, ex-pats, etc. Cars are marketed globally these days; if you’re not selling in the US, expect to die.

  • avatar
    chicagoland

    Sounds like a few years ago here. People will say ‘dont cut jobs/plants/etc’, but then they say ‘Oh I never buy new cars, too much $’.

  • avatar
    NMGOM

    I wonder what this overcapacity in Europe (and its sales consequences) is going to do the Volkswagen’s pledge to be the worlds’ #1 car maker by 2018?

    And if the BMW/Toyota collaboration goes even further into formal partnership, how will that affect who is going to be #1? Neither one of those car manufacturers seems to be struggling at the moment.

    Any thoughts?

    —————-

    • 0 avatar
      th009

      In all likelihood, overcapacity at Fiat, Renault, PSA, Ford and GM will have next to no impact on VW’s plans. VW has just been picking up market share from the not-so-Fabulous Five. And moves like Fiat delaying or cancelling product launches just plays into VW’s hands.

      • 0 avatar

        With half of its global sales in the EU, even mighty Volkswagen cannot avoid being impacted. It is. Europe is hampering VW’s aggressive growth plans, and the wholesale changes in VW management show that someone is getting nervous.

        However, having half of its sales elsewhere, VW is not as much impacted as other companies that have most of their sales in the EU. VW IS impacted by overcapacities of competitiors, because they result in panic sales and huge discounts.

        Gaining market share in a down market won’t pay the bills, but it definitely will be a big help when the market turns around again.

    • 0 avatar
      Dimwit

      The biggest problem with everything is politics. It’s rather obvious that countries with (healthy) auto manufacturing do much better than countries that haven’t any. That means France, Spain and Italy will fight to the death to keep their native plants running as much as possible and hope someone else folds first.

      It’s all a very high stakes poker game. Only Germany can afford to lose a little and that means Opel is toast if someone can convince GM to pull the trigger.

  • avatar
    Tstag

    Not all EU countries are struggling with too much capacity. In the UK all our plants are at or heading towards capacity. So much so that the likes of JLR are looking to sweat the plants for more capacity. I wouldn’t be surprised if a new car factory gets built in Britain.


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