Have We Really "Saved" GM/Government/UAW Motors? ... Who Will Fix Europe's Auto Industry --- and the Rest of Europe?

Everyone is now very much aware of the U.S. government's "successful" bailout of GM. At least that's the story that's making the rounds this election season.

But not everybody knows about the "quietly" developing auto related profitability crisis in Europe and how this may ultimately impact our own U.S. auto industry. As Yogi said, "It ain't over 'til it's over."

But even more to the point, Europe's auto-industry crisis will likely negatively impact the solvency of several European nations as well. If Europe's industries in the private sector don't generate the wealth, the European welfare state will have no wealth to redistribute, regardless of what the politicians and unions want to do.

In Europe, Idle Car Factories Live On tells a story very seldom told about Europe's current auto travails. Since what happens in Europe doesn't stay in Europe, it's instructive for us in the good old U.S.A. to know what's happening there, too:

"Few places illustrate the troubles of the European auto industry better than Fiat's vast Mirafiori plant near Turin, Italy.

The factory was churning out cars earlier this week but suddenly became a ghost town on Thursday and Friday, its production lines silent and the company's adjacent headquarters offices almost entirely empty and darkened. The same thing happened on two days earlier this month and will again on four more days in July.

Shutdowns similar to those at Mirafiori have become a regular occurrence all across Western Europe and reveal an auto-industry crisis that is quietly reaching dire proportions while so much attention is fixed on the continent's debt woes.

Europe's auto industry has suffered declining passenger-car sales in each year since 2008, and is on track to absorb an at least 7% drop this year.

All told, auto makers here are selling about 20% fewer cars than they were in 2007, leaving many with mounting losses and far more plants, workers and production equipment than they can keep busy.

"Europe is a mess," John Hoffecker, a managing director at AlixPartners a consulting firm with a large automotive practice, said this week in an interview.

Powerful labor unions and most European governments fight efforts to close plants because of the jobs that are lost. As a result, auto makers keep their factories open but cut their hours and assembly-line speeds to reduce production. About 30 of the 98 European auto-assembly plants owned by major car makers are operating below 70% of their capacity, levels that typically cause plants to run up significant losses, according to AlixPartners."

My Take On All This ... Global Markets

The auto industry is global in nature. And it's in trouble as car sales remain quite low in comparison with the industry's manufacturing capacity.

There's a glut of European manufacturing capacity and a dearth of sales. Something's gotta give.

So let's turn our attention to what the impact of all this excess European capacity may mean for the U.S. auto industry.

European manufacturers (along with Japanese makers like Toyota, Honda and Nissan) have long produced more cars in Europe (and Japan) than they've sold there. The excess production has largely been exported to America. Thus, Europe's profitability is heavily dependent on the U.S. market.

It's Ugly

In straight language, Europe's auto industry is a version of dead man walking now. And the problems of the auto industry are illustrative of the problems facing the heavily indebted European welfare state as a whole. Fewer sales equals less production equals fewer jobs equals fewer taxes equals higher deficits equals more debt. And all this equals a very bad CREDIT RISK.

No Good Choices

Now let's look at two awful alternatives now facing the European manufacturers: (1) What if Europe closes 50% of its auto manufacturing capacity, which the facts indicate it should?; or (2) What if it doesn't and instead decides to export cars to the U.S. market at lowball prices, which it could do due to both a weak euro currency and its totally underutilized factories?

And if European companies choose #2, what impact will this have on GM's manufacturing operations and profitability, market position and sales in the U.S. auto market?

The Larger Lesson

Back to Europe. Private sector profits are a necessary and fundamental precondition to funding the European welfare state. And much of that profitability historically has come from exporting cars and other goods to the U.S.

Meanwhile, European companies and Japanese companies have also built non-union and cost competitive operations in the U.S. to serve the market here.

Hence, heavily unionized GM has huge competitive issues in its home market, excluding any future impact of increased European exports to the U.S. to keep the underutilized European factories running.

And in Europe, if its auto-industry factories don't run, sovereign wealth will disappear even faster, assuming that's even possible. And that's why many of those countries are a modern day version of dead man walking.

Summary

Back to GM. Throw in the problems facing GM in European countries and markets, and it's easy to see how GM is by no means a "saved" company.

GM indeed has a very long way to go to preserve and protect its future.

That said, so do most European countries.

More and more, it appears that the lasting problem for many European nations will not be high interest rates on borrowed funds.

The biggest problem will be their potential insolvency and the resulting unacceptable credit risk that  poses to otherwise willing lenders.

No creditor is willing to loan money to a borrower unless he has a reasonable expectation of being repaid, no matter how high the interest rate charged.

Nothing on nothing is nothing.

Thanks. Bob.