Euro Auto Capacity Reduction: a snapshot and thoughts

Ford’s announcement today that the company will cut it’s Euro capacity by 15% or 350,000 units shows that Alan Mulally has shown the same courage he used to save Ford from the US auto bailout to his Euro operations.  Rather than prolonging the agony of Euro restructuring like so many other players, Ford has taken a decisive step.

Despite almost two years of bluster from continental players, no other make has closed more than one plant.  Even PSA, in its dire straights still retains at least one plant too many.  Nevertheless, the industry no ha surpassed the 1 million unit mark in capacity reduction.

IHS and other forecasters have concluded that under last year’s outlook, the region was at 3 million units of overcapacity  a number oft quoted by outspoken Fiat CEO Sergio Marchionne.  Still there are other plants that have been talked about that would reduce capacity by at least another 1 million units, and I am keeping my eye on further announcements.

Sergio Marchionne recently accused VW of pushing Europe to a “bloodbath in 2013 with aggressive pricing and accusing VW of not being concerned with reducing capacity in Europe.  Some have jokingly suggested that it is VW CEO Martin Winterkorn who is pushing capacity reduction — the capacity reduction of his competitors like Fiat and PSA.

Marchionne has also commented that if the current conditions exist, Fiat still has one too many plants in Italy.  Clearly there is no doubt Fiat needs to reduce further, and I am not a believer that using Italy as an export base for US Chrysler product is a sound solution.  Fiat does not need the FX and logistical challenges on volume cars, especially when competitors like VW are moving Euro sourcing of main product to US and Mexico.

It come down to politics: For those who have been following the argument that the capacity issue needs a Eurozone resolution are not facing political reality.

In France, where the state has just guaranteed a PSA bailout and holds a very active 15% stake in Renault, there is little concern for what anyone in Brussels, Berlin or Turin think.

In Italy, where the state has been vocal that Fiat needs to deliver on its “Fabrica Italia” plans despite the company indicating otherwise, I don’t expect any acceptance from politicians despite Fiat’s game of “chicken” waiting for capacity utilization to fall to obscene levels and then force cuts.

In Germany, where VW and the premium players have been more active (and the German economy has already been regularly tapped to support the Eurozone), I don’t see any political appetite to aid the weaker player, Opel.

I was working the Japan in the early 2000’s while the industry took out nearly 2 million units of domestic capacity.  It took Nissan to take the bold lead, born out of desperate circumstances. Toyota quietly followed and in the end bought the domestic market 10 years until the 2011 tsunami laid bare the structural decline demand..  The more stubborn US industry closed 18 plants and more than 5,000 dealers.  If Euro auto execs are waiting for a more dramatic moment, it may well come, but I suspect it will come with political backlash and handcuffs that will not be good for them or their shareholders.

Comment:

Ford deserves credit for its leadership.  Expect Fiat to follow in the coming months and then Opel in the following year. But don’t expect PSA to have a free hand for further cuts.  

In the end, VW will continue to leverage it’s volume and cost to eat up market share.  VW and Asians like Hyundai/Kia will benefit form lack of product investment by Fiat and PSA/Opel, exacerbating their volume leverage issues.

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