Friday, October 19, 2012

Update on European Excess Auto Making Capacity

Things aren't getting any better for European car manufacturers. As a matter of fact, they seem to be  getting worse by the day.

Of course, this glut of car making capacity will reverberate around the world in time.

European Car Sales Slump Continues updates the dire situation for us:

"European car sales declined for the 12th consecutive month in September, piling pressure on some of the region's mass-market auto makers to more radically restructure their operations as slumping sales further expose the industry's problem of chronic overcapacity.

New-car registrations, a proxy for sales, in the European Union shrank 11% compared with a year earlier to 1.01 million vehicles, the lowest figure for September registrations in more than a decade, and fell 7.6% to 9.37 million cars in the January-to-September period.

Spain suffered the biggest fall in registrations, down 37%, while Italy and France recorded drops of 26% and 18%, respectively. Even in Germany, the EU's biggest single car market and largest economy, registrations fell 11%.

Mass-market manufacturers have responded to falling demand by lowering prices, but the severity of the situation has now forced them to consider more drastic action.

General Motors Co. and France's PSA Peugeot Citroen forged an alliance in March to save costs in fields including purchasing and vehicle development. Beyond this, Peugeot plans to halt production at a factory in France in 2014, while GM's Opel unit is in talks with labor unions over a wide-ranging restructuring program that might include closing a factory in Germany after 2016.

Elsewhere, Fiat  has said it is looking to use spare capacity to boost exports to the U.S. and foreign markets and is considering revamping its strategy for its own-name brand. France's Renault SA  and Japanese partner Nissan Motor Co. have raised their target for joint cost savings in coming years, while Ford Motor Co. is offering voluntary buyouts in Europe to cut jobs. . . .

 Weak demand and cutbacks in production are spilling over to the car makers' suppliers. 

"Macroeconomic conditions have deteriorated in recent weeks and some softening in order books is now evident, particularly regarding European automotive and industrial markets," said GKN which supplies auto makers with powertrains and other components. GKN added that demand in the U.S. and Chinese auto markets remained robust.

Many car companies were hit by double-digit declines in new registrations in September. Renault's registrations dropped 30% from a year earlier, while Fiat recorded a 19% fall. Registrations at GM's European unit fell 16%, compared with a 15% fall at Ford and a more modest 8.1% decline at Peugeot.

Even Europe's largest auto maker, Volkswagen . . . suffered an 8.0% decline ....

South Korean auto makers continued to gain market share in Europe last month, though the pace of their growth has slowed. Registrations for Hyundai Motor Co. were up 3.3%, while affiliate Kia Motor Corp. posted a 4.9% gain."

Summing Up

The formula for achieving excessive industry capacity is a very simple one.

Artificial and unsustainable demand causes industry participants to put in place too much capacity due to the easy and cheap credit induced buying bubble.

Then when the overly indebted consumer cuts back, competitors proceed to cut prices in an unsuccessful attempt to create additional demand.

Then after everybody has cut prices to the point where profits disappear, players make every effort to be the last one standing, following the "two guys being chased by a bear" formula for survival.

As the 'bear chase' example teaches, the survivor doesn't have to run faster than the bear --- he just needs to beat the other runner.

And in the global car industry, that takes both time and money, of course, which often results in government subsidies and bailouts. GM, for example.

All in all, it's mostly a case of ongoing tail chasing, pure and simple. And for the taxpayers, it's very expensive tail chasing at that.

Thanks. Bob.

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