European Overcapacity And Opel Rescue Bump Heads
Europe’s auto capacity is staggeringly underutilized, as political pressure to protect jobs stacks overcapacity upon overcapacity. Analysts lay out the gory details at Automotive News [sub]: Global Insight says European production capacity is currently at 59 percent, while PriceWaterhouseCoopers figures excess production is 6.8 million vehicles. Assuming an average production of 300,000 units per plant, over 20 of Europe’s 100 major auto plants will have to go to bring supply back in line with demand. Though Saab’s seemingly imminent closure should take a first step towards a European coming-to-terms with its unreformed auto industry, the Opel deal is starting to look like an opportunity that GM could be too state-aid-dependent to take advantage of.
New Opel Boss Nick Reilly is targeting a four to five percent profit margin by 2012 or 2013, with break-even coming as soon as 2011 according to his estimates. European automakers are already bracing for a rough 2010, as scrappage schemes expire exposing markets to an unprotected downturn for the first time. But the piece missing from Reilly’s puzzle-picture is an honest confrontation of the overcapacity issue. GM has said it won’t shut down any of Germany’s four Opel plants, and is leaving Vauxhall largely unmolested. Not only is possible state aid a reason to keep these plants open, but GM also doesn’t want to face a major PR hit in major European markets like Germany and Britain. But that’s not all. Even Opel’s Antwerp plant, which is considered the most suitable for shutdown due to the lack of local supply chain and The Netherlands’ small car market, may not be shut down because of the $573.2m shut-down costs.
GM needs about $5b in state aid from European countries, while also cutting some 9,000 jobs. That combination seems to be a prime recipe for the kind of half-hearted capacity trimming that brought Europe to its current unsustainable state. Stefan Bratzel, an auto industry academic at the University of Applied Sciences in Bergisch Gladbach explains the danger:
The idea of closing just one, if at all, is sub-optimal and even that appears to be negotiable. They need to concentrate their manufacturing in certain sites and not continue to have a little bit of production everywhere,
Michael Tyndall, an auto specialist at Nomura International in London tells the NYT.
This is what we’ve seen throughout this crisis, political involvement and bargaining and so on and no factories are closed. I don’t think it’s good for the sector in the long term, and it’s one of the reasons investors avoid autos. But it’s a politically sensitive and highly visible industry, and I think politicians feel exposed when it comes to autos
Nobody likes thinking about putting people out of work, especially at this time of year, but if overcapacity isn’t addressed, it will continue to drag down the entire European industry.
More by Edward Niedermeyer
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