Europe has an abundance of car makers. Apparently, Brussels is preparing the populace for less. As EU business ministers gathered in Brussels to discuss support for the flagging industry, as French manufacturers lobby their government for aid, European Union industry commissioner Guenter Verheugen said some European carmakers face an uncertain future.
“There is no guarantee that all the main European manufacturers can survive the crisis,” Verheugen told BBC radio. Translation: don’t bank on a bail-out. If you get in trouble, you’re on your own. There’s surely BIG trouble ahead; Verheugen forecasts a further 20 percent drop in sales in 2009. He said the industry’s outlook was “to say the least, brutal,” as cash-strapped consumers defer big-ticket purchases.
Note the emphasis on “main European manufacturers.” If the main ones aren’t sacrosanct anymore, then it’s open season for the smaller ones. In the world according to Verheugen, China soon will have a lot of established brands to choose from.
According to Associated Press via Toronto’s Globe And Mail, Verheugen insists that the 27-nation bloc will not alter the global car market by funding overproduction.
“We have no intention to distort competition. We have no intention to allow a race for subsidies,” Verheugen told reporters. “There is no free ride for the member states and nobody asked for that.” Guenther Verheugen is a citizen of Germany, home of the largest number of European car manufacturers, which holds a 47 percent share of Europe’s car market.
In other words, the biggest welfare states in the world have plenty of stomach for endlessly funding bored twenty-somethings who refuse to work, but helping out productive companies is too much to ask.
This is why Asia is winning the economic war, right here.
Jack: the car market just got shrunk. When that happens, the weak companies die.
Why is this so horrible? Things change. Would you think government subsidized liveries and buggy makers was a good idea?
I agree with Jack and toxic. The weak companies should be allowed to die. And one big reason they are where they are is that Europe has a lot of tax consumers and not enough tax producers/private sector consumers.
So the EU is letting its auto industry sink or swim according to free market principles, while the US converts its car companies to state ownership?
I think I need to have my glasses checked.
Honest question: Is the opinion of an EU commissioner the last word on the subject? Or could an individual nation take action if it saw fit? And would, say, France be inclined to see it as an economic necessity to prop up Renault or Peugeot?
One reason it may be politically easier to not bail out a European automaker (at least at the EU level) is that the market has always been more balkanized than in the US. There was never a domestic automaker as dominant across all of Europe as GM was for many years in the US. Nationalism may also be a factor, e.g., would the Germans care much if a French automaker went bankrupt?
One other factor is that the European auto industry has suffered from overcapacity for years. Europeans are thus more used to the idea that a thinning of the ranks of domestic automakers could be useful, particularly as the Asians make greater inroads.
Answer to Dr. Lemming:
1.) The EU has very strict rules when it comes to straight subsidies. They are, basically, against EU law – with some exceptions. Changes would need the vote of all member states – good luck to get the votes from states with no domestic car industry. If a member state ignores the rules, they might (most likely will) be challenged.
2.) There are grumblings that the EU is preparing a WTO case against the U.S. because of the Detroit subsidies. If the EU subsidizes, no chance of winning. If they keep their nose clean, big trouble.
Just because a minister at the EU says something doesn’t mean that the individual countries will go along. It is all well and good for an appointed bureaucrat in Brussels to shoot his mouth off, but the elected governments in the member countries need not go along. Do you really think Germany will stand by and let any of its native automakers fold up? France stepped in to save PSA-Peugot-Citroen before and will likely do so again. The EU can only go so far in attempting to kick around France and Germany; while it is able to abuse less influential members with impunity.
Finally, why are government bureaucrats around the world ready to spend almost any amount of money to prop up financial institutions while in the same breath telling industrial companies GTH?
Regardless of what the EU says, France will not stand by and watch their domestics be ravaged by the free market – expect some kind of rebate for those citizens who trade an old clunker for a new, greener car, provided it’s built by Renault or PSA of course. Similar with Germany.
Don’t forget, the EU started life as the EEC – for the benefit of the French (agriculture) and Germanys (industry) – nothing’s changed in 50 years.
Probably the only country to follow the EU rules will be the UK, so bye bye Jaguar and Land Rover.
“why are government bureaucrats around the world ready to spend almost any amount of money to prop up financial institutions while in the same breath telling industrial companies GTH?”
Manufacturing industries can come and go, but a meltdown of the financial sector can do serious damage by erasing consumer wealth and confidence for a long, long time.
Having said that, I share your outrage and feel that neither industry should receive bailouts.
“Finally, why are government bureaucrats around the world ready to spend almost any amount of money to prop up financial institutions while in the same breath telling industrial companies GTH?”
Becasue the guys in positions to hand out bailouts tend to hail from the financial sector, or at least from sociogeographic strata where the financial sector is big. And so does most commentators in the national media.
Few, if any, of these guys have ever met an auto worker, making it easy to view those as ‘some guys in flyover country who refuse to accept economic change, clinging to guns and religion’ or some such.
While on the other hand, when finance suffers, it’s their friends and former colleagues who have to downsize their mansions and get rid of their yachts. So obviously, it’s plain for all to see, that the world is coming to an end, and ‘we’ need to do something……
Pretty much all people tend to rate their own job, their own city, their own social group etc. more important than an independent observer would rate it. Economists, former Goldman Sachs executives and NYT journalists not excepted. Assymetric access to the channels of power explains the rest.
@stuki: Well said.
For me at least, bailing out the financials wouldn’t be so infuriating if (1) the tax payers went to the head of the line for any return, (2) the stockholder’s interest went to zero, and (3) exec pay was decimated. But with Paulson driving things, it haven’t worked out that way.
It’s just amazing to hear the CEOs, like Ken Lewis of BoA run on about how they won’t have to cut the dividend, won’t have to sell more stock, etc., and then within a few weeks do a 180 on both. Is corporate America populated by a bunch of Wagoners or what?
Meanwhile, back at the car lots, the local Toyota dealer has 25 new Yaris stacked up on his lot; and 8 new Prius. That’s up from 15 Yaris and about 4-5 Prius a couple of weeks ago.
Dave:
Even if the UK decides against bailing out Jaguar and Land Rover, there’s nothing stopping India from bailing out Tata.
Probably the only country to follow the EU rules will be the UK, so bye bye Jaguar and Land Rover.
The UK govt claimed it was EU laws which prevented them from bailing out MG/Rover, but they seem to have no problem propping up a series of banks. I think they will expend all their effort trying to maintain London as Europe’s financial hub and throw what’s left of manufacturing to the wolves.
That will give Tata all the reasons they need to move Jag and LR production to India.
The UK Government has a long track record of wringing their hands and claiming that there’s nothing they can do to avoid it ‘It’s an EU Directive, Old Chap – hands are tied…’
When a little digging often reveals that it was the British delegates to the EU who proposed the ruling and ruthlessly railroaded it through.
@Dave: France already has a clunker-culling program in place, and Germany will have an even bigger one. However, the programs cannot be limited to French or German cars, that would be very much against EU law. Can’t even exclude non-EU cars.
This, and tax measures (no tax for greener cars etc.) is legal in Europe and doesn’t count as subsidy. Programs to promote greener cars are legal. Loan guarantees are legal to some extent. Straight subsidies aren’t.
There are a lot of subtleties to EU politics that parallel regionalism here in the States. Verheugen might be really saying, “Too bad about Volvo and Saab going under. I’m sure VW, Opel, BMW and Mercedes will rise to the occasion and help their former customers.”
stuki:
You’re absolutely right.
But you guys really think France will bow to what some German euro-crat vomits out?? Or for that matter, Italy? Even Spain?
Yeah, straight subsidies are out but “under-the-table” ones are the “de-facto” instruments of choice.
M. Sarkhozy said almost as much a while back, promising not to let the French people suffer because the car-makers are too important.
stuki:
Sorry, the financial sector is different (although I’m not saying the US has handled the financial bailout well).
The Detroit automakers are failed companies. They are actually very lucky that the financial crisis occured. If the US was not in a recession with rapidly increasing unemployment the governement would probably just let the Detroit automakers meet their inevitable bankruptcies without intervention.
Even before the financial crisis the Detroit automakers debt was all rated near junk or junk.
Bad companies fail all the time. On the other hand, if the financial sector fails even well run companies cannot get loans.
Here it is put simply:
Britain let its auto industry fail:
1 British Pound = $1.4839
Iceland let its banks fail:
1 Icelandic Krona = $0.0044 now
1 Icelandic Krona = $0.7441 (169 times as much) last October before their banks failed
“Bad companies fail all the time. On the other hand, if the financial sector fails even well run companies cannot get loans.”
But didn’t horrifically bad decisions at many of the major money center banks actually cause the crisis we are seeing now?
Everything Verheugen said was sensible. In comparison to their national counterparts, most members of the Commission and their administrations are highly competent, by the way.
Verheugen’s words are 100% compatible with EU law starting with the Treaty of Rome.
There are emergency funds available for companies in dire difficulties; Barroso has said exceptions will be made to normal EU competition law under the present circumstances. Verheugen was probably saying “exceptions yes, but no bail-out”. Which I agree with.
The comment about “the biggest welfare states in the world having plenty of stomach for endlessly funding bored twenty-somethings who refuse to work”, is that reality-based?
None of the French automakers will go under for wont of government subsidies…Cher Monsieur Sarkozy has time and again proven that “the national good” overcomes the market solution (see: Sanofi-Aventis, Alstom, etc).
The EU government is a convinent thing when it comes to tax time (w00t! a new tax that pays to throw away the new product I just bought…w00t! a tax on blank CDs…), but they can stay the f–k out of the business of national business.
“Jack Baruth :
January 18th, 2009 at 9:31 am
In other words, the biggest welfare states in the world have plenty of stomach for endlessly funding bored twenty-somethings who refuse to work,”
I’m from Europe – left in my twenties – and I never heard of such thing… is this another “American comment” about Europe?
There’s help for the unemployed, yes. Just like here, in many states, it’s designed to help the neediest people, who are out of work etc. It’s not a lot of money but helps – as a matter of fact US programs have helped some 5-10M people since the 1996 welfare reform.
But hey, why stop at bashing unemployment welfare? Guess what, there’s more: those nasty Europeans have universal healthcare systems – based on private providers, mind you – that usually works far better than ours, way more effective yet cost 2/3rd or half of what we pay for ours (in % of the GDP) even though they usually cover everybody over there unlike the US parasite-feeding (HMO) “system” (hah, like if there’s any system here!) which left 40-50M people without coverage by now.
“but helping out productive companies is too much to ask.”
Just like the most loudmouthed market-capitalists did here, in the US? Let’s help “productive” companies – companies who make crappy products nobody wants to buy because they look ugly or they are low quality or they are very costly not only to buy but even more so to own (or all of these)?
“This is why Asia is winning the economic war, right here.”
You mean those countries with subsidized/socialized healthcare, public education (and in some cases with limited civil rights)? Those Asian countries, you mean, the ones who largely rely on their US sales/exports?
I often wonder what on Earth they teach in US schools…
“Answer to Dr. Lemming:
1.) The EU has very strict rules when it comes to straight subsidies. They are, basically, against EU law – with some exceptions. Changes would need the vote of all member states – good luck to get the votes from states with no domestic car industry. If a member state ignores the rules, they might (most likely will) be challenged.
2.) There are grumblings that the EU is preparing a WTO case against the U.S. because of the Detroit subsidies. If the EU subsidizes, no chance of winning. If they keep their nose clean, big trouble.”
Well worded – national govt’s can do a lot of things but none can openly disregard EU laws, period.
BTW it’s today’s news:
France readies car industry rescue plan
January 20, 2009 – 12:09AM
France could take stakes in struggling car makers, the industry minister said, on the eve of a key meeting to agree a financial rescue plan for the industry.
Facing collapsing demand, Renault, PSA Peugeot Citroen and their suppliers have dramatically cut production and shed thousands of jobs as they struggle to stay afloat in the global economic downturn.
Industry Minister Luc Chatel told Le Figaro newspaper that several options were under consideration to save a sector that directly or indirectly employs 10 per cent of the French workforce.
“Carmakers do not necessarily need capital, but in exchange for our financial support, an increase in capital could in some cases be a good trade-off,” said Chatel said in the interview.
President Nicolas Sarkozy last week said the state was ready to “mobilise lots of money” to shore up car companies that opt not to relocate their factories and jobs outside France.
On Tuesday, Prime Minister Francois Fillon will join executives from car manufacturing companies and suppliers along with union leaders for a meeting to agree on a broad plan dubbed a new “auto pact”.
A 300 million euros ($A591.66 million) restructuring fund will be formally launched and a broader rescue package is to be unveiled in late January.
Le Parisien newspaper reported that the overall plan could total between five and 10 billion euros ($A9.86-$19.72 billion).
“We are looking at all options,” said Chatel. “But the big question is what do we get in return.”
With car production in France down by 10 per cent in the first nine months of 2008, companies are under fire for running factories abroad: Renault’s popular Twingo is built in Slovenia and the Peugeot 107 city car in Slovakia.
“Yes the situation is serious,” he said. “The sector today is facing a two-pronged problem of demand and financing, and also a structural challenge in terms of competitiveness.”
France, which already owns a 15 per cent share in Renault, is also warning carmakers to forego paying a dividend to shareholders if they expect taxpayers to fund state assistance.
Other measures being weighed include soft loans and loan guarantees.
Finance Minister Christine Lagarde on Friday made the case in Brussels for relaxing the European Union’s strict rules on state aid to help the industry adapt to demand for more environmentally-friendly models.
But the European Commission has warned against unleashing a “race for subsidies” by governments in half a dozen EU countries where the automobile industry is in dire straits.
Europe’s second biggest automobile sector after Germany, France’s car companies and spin-off industries employ 2.5 million people.
Japan’s Toyota, American giant General Motors and Germany’s Daimler AG all have plants in France and may be eligible to tap into the state assistance, said Chatel.
After bailing out banks to the tune of 40 billion euros ($A78.89 billion), the French government has repeatedly said it will take measures to prevent the auto industry from becoming a casualty of the economic slowdown.