Thursday, July 26, 2012

PART 1 ... Auto Industry ... Europe's Real Problems ... Competitiveness

This morning the world's financial markets have been rallying after ECB head Mario Draghi said the European central bank would do whatever it takes to save the euro currency. Now let's address the bigger issue of whether European companies can become globally competitive without totally trashing the value of the euro currency.

We'll first take the auto industry and then follow through with a look at the steel industry as well as the enormous role that unions and governments play in preventing European firms and factories from making much needed progress in their financial condition and competitive product offerings.

Europe's Auto Industry Has Reached Day of Reckoning says this in part:

"For European carmakers, the day of reckoning may finally be at hand.

The most dreadful year in car sales in more than a decade may require the industry to deal with the overstaffed, underused  factories that have been undermining earnings for years.

As the region’s weak economies keep many European car buyers away from showrooms, analysts say the unprofitable automakers have no choice but to start closing production lines and cutting payrolls. For the weakest, like General Motors’ Opel unit and PSA Peugeot Citroën, their survival may depend on it.

The question is whether any of the companies can do it fast enough — or at all — in the face of restrictive European labor laws and stubborn political resistance to cutbacks.

“I’ve never seen it this bad,” Sergio Marchionne, chief executive of both Chrysler and the Italian automaker Fiat, said during an interview. “All the unresolved issues that have been plaguing the industry for a number of years have all come forward.”

Fresh evidence came Wednesday in quarterly earnings from Ford and Peugeot, which both reported huge losses and are each on track to lose more than $1 billion in Europe this year. Later in the day, the ratings agencies Fitch and Standard & Poor’s both lowered Peugeot’s debt by a notch, placing it deeper into “junk” territory.

Huge overcapacity, some auto executives say, has spawned a crisis similar to the one the U.S. industry barely survived just a few years ago. In fact, the downturn in Europe threatens the remarkably rapid recoveries that Ford and General Motors were able to make after Detroit’s moment of truth in 2009.

Underused plants are ruinous for car companies, which must continue to pay upkeep costs and make payroll even as revenue plunges. By some estimates, the European industry as a whole is operating at only about 60 percent to 65 percent of capacity. As a general rule, plants must operate at about 75 percent or 80 percent to be profitable, analysts say.

The figures may be much worse for some factories, including Fiat plants in Italy, analysts said. At the same time, German luxury carmakers like BMW and Mercedes continue to thrive and are operating at or near capacity.

Few business undertakings are more tortuous than closing a European car factory. Peugeot braved howls from unions and the new Socialist government of François Hollande this month when it said that it would close a plant in Aulnay, outside Paris, in hopes of stemming losses that reached €819 million, or $993 million, in the first half of this year.

Closing a plant typically requires a long and costly battle with unions, which have more legal rights than in the United States. German law, for example, requires companies to negotiate job cuts with worker representatives, who can demand large severance payments or pensions.

In an effort to avoid a confrontation with labor, Peugeot has promised to convert its plant in Aulnay, which employs 3,000 people, to other, unspecified manufacturing. The company also promised to help employees find new jobs after car production ends in 2014.

But such measures add to the cost at a time when Peugeot is hemorrhaging money. And the compromises have not prevented political leaders from pushing the company to scale back plans to cut a total of 8,000 jobs in France, or dissuaded workers from protesting outside the company’s Paris headquarters on Wednesday.

Even after four years of catastrophic sales, only a few of Europe’s 100 or so auto plants have shut down. The closures include an Opel factory in Antwerp and a Fiat plant in Sicily.

“It’s a question of who has the stomach for the fight,” said Tim Urquhart, an analyst at IHS Automotive.

But with the European car industry on track to suffer its worst year since 1996, more closings seem unavoidable. About 12.4 million vehicles will be sold in the European Union this year, according to industry estimates. That is 3 million less than in 2007.

The car industry provides one of the most vivid examples of how the euro zone debt crisis is infecting companies outside the financial industry.

There are some disturbing parallels. In both cases, the pain falls disproportionately on Southern Europe, while Germany seems immune. Car sales actually rose slightly in Germany during the first six months of the year. They plunged more than 14 percent in France and almost 20 percent in Italy, which is in recession.

In Portugal and Greece, which have both required European bailouts and are enduring severe economic downturns, car sales fell more than 40 percent through June, according to the European Automobile Manufacturers’ Association."

Summing Up

European car making capacity is heavily underutilized as a result of uncompetitive operations, sovereign financial problems, recessions and the unwillingness of many European unions and governments to face reality.

 To have any chance at viability, those manufacturers able to survive today's financial losses must be free in the future to take the necessary steps to provide a globally cost competitive product offering. Otherwise it's game over.

But the auto industry is not the only huge problem for European countries and workers. Next we'll look at the steel companies, who face very similar issues.

Governments can't protect people or companies from global competition, but that doesn't mean they don't pretend that they can as long as they can.

Sooner or later, however, government knows best "protection," can kicking and pretending will be replaced by ugly reality. That's happening throughout Europe now.

And when reality finally sets in, it's neither a pretty picture nor an easy problem to solve.

Stay tuned.  Steel's next.

Thanks. Bob.

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