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.
I’d wager another reason keeping the plants open must have to do w/ the cost of closing them down. It’s much more expensive to fire workers (and then having to re-hire them when thing pick up) in Europe than in America.
Everybody is aware of the capacity problem. I’ve said it all the time: “Keep the plants open” is a political message for internal consumption. I had predicted that the game would be played until after the German elections, and then the EU would do the dirty work and shoot the deal down. Blame the EU, blame the clumsy Americans, case closed. And so it happened. What I could not imagine was that GM would want to go it alone and think they would get the money. They won’t. Volkswagen is making behind the scenes noises that it is unfair to the rest of the German automakers (well, mostly to Volkswagen) to prop up GM-owned Opel. If Berlin has to choose between Rüsselsheim or Wolfsburg, you know on who’s side they will come down. There are important State elections in Nordrhein Westfalia on May 9th, which can affect the Upper House of the German Parliament and make governing a bear if lost by the current center-right coalition. Until then, closing down any plants, especially the Bochum plant in Nordrhein Westfalia, is taboo. My prediction is that things will drag on until May, and when the elections are over and won by the CDU/FDP, Opel will be thrown to the wolves in Brussels.
FromBrazil: You are right, it is very expensive to let people go in Germany. Costs you about one to three month salaries per year employed, more if the unions are involved. Say someone worked 12 years at Opel, he gets one to three years in salaries. Ouch. If the company goes bankrupt, the gets nothing.
Mr. Schmitt:
Yikes! Better hope then that Opel lives on!
Bertel,
Do you think GM is playing the political game by saying it won’t close plants until the state aid deals are done? My thoughts are that if GM says which plants it wants to close, it will eliminate some potential contributors. I know that the EU says deals can’t be dependent upon state aid and jobs. I am assuming GM is going to try to get money and close plants were it doesn’t get money, all of this “being the right business move” and “not dependent upon state aid”.
Regarding the Opel Antwerp plant:
Antwerp is not in The Netherlands, but in Belgium (even smaller).
Unlike the Netherlands ,which only have a Mitsubishi plant and some very small companies (Donkervoort, Spyker at least until now) Belgium has several auto plants (Opel, Ford, Volvo, VW etc.)
The biggest threat for these Belgium plants is that none of these plants are the biggest plants of the companies (maybe except Volvo). So if Opel closes the chances for the other plants become worse.
The Opel plant in Antwerp is still in Belgium so the size of the Dutch market isn’t of importance.
Do you think GM is playing the political game by saying it won’t close plants until the state aid deals are done?
Of course. Reilly is not a klutz like Whitacre. He knows how the game is played. What I (and some of my contacts in Berlin) believe is that the German government is playing a political game: They keep the plants open and the hopes up until the Northrhine Westfalia elections are in the can. Then they let Brussels do the dirty work and shoot down state aid. Case and plants closed. Germany currently has 3.4m unemployed. For 2010, 3,97m are expected, for 2011 4.13m. 25000 more or less don’t matter. Shutting down capacity alleviates competitive pressure and secures jobs at stronger makers. That’s the cruel, but realistic way of looking at it. Just nobody dares to mention it in the open.
Well, at least GM found the right man for the job since Whitacre won’t be handling it.
This sounds a lot like the arguments surrounding the GM & C dealership closings in the US.
“European overcapacity” is somewhat oversimplified, though. While there is indeed a lot of overcapacity, the problem varies a lot by manufacturer. Some have been more successful than others in rationalizing, or in selling enough cars to keep the factories busy, others have failed or one or both counts.
Unfortunately for Opel/Vauxhall workers, GM’s European sales have been on a downward trajectory for years, and the company has failed to address the excess capacity, so they will feel this problem at a personal level.