For over a decade, Automakers are bleeding in the European Markets. U.S. car makers are probably the worst hit. Yet, not a very long time ago, Europe was the biggest market in the world for automobiles. In spite of several lay-offs, factory shutdowns and discounts of up to 24%, carmakers have not even come close to recovering their losses. Ford (F), for instance, has lost $1.8 billion in 2012 alone. General Motor (GM) too isn’t too far behind.
A Simple Comparison
Let’s draw a simple comparison between the crises faced in the U.S. with that of Europe.
United States addressed its Crisis in 2009 by pro-actively right-sizing its production capacity, thereby closely aligning it with demand forecasts. By doing so, the time it took for a turnaround was less than three years.
The European market, though, has a different story to tell. Ford and General Motors probably undermined the dynamics of closing a factory in Europe. The lay-offs at home went rather smoothly for Ford which had to shell out around $155,000 per worker to cover severance costs.
On the other hand Europe is riddled with complex political interests which force carmakers to keep plants open to save jobs. There are still plants operating at around 60% of production capacity or even lower! This explains why the turnaround has been much slower compared to the U.S.
Ford did take some hard decisions to cut losses. It reduced 18% of its production capacity by closing down production facilities in Genk, Southampton and Dagenham. However, this time it faced severe obstruction from labor unions.
At Genk, the workers barricaded factory gates, brought production to a grinding halt and even stopped cars from being shipped out to dealer points. When the management did finally reach an agreement with the unions to close down the factory by December 2014, the estimated cost of layoff per worker stood at a whopping $190,000 per worker.
General Motor too is now well positioned to cut losses after it announced the decision to pull out the Chevrolet brand from Europe. Given that Opel out sells Chevy by five to one in European markets, despite numerous efforts from the company to promote the Chevy brand, it only makes sense for GM to focus on the Opel variant.
A New Dawn
The European market is finally waking up from the long slumber. Buoyed by subsidies from the government and dealers to exchange the old cars for new ones, buyers are now feeling confident to make that long delayed purchase.
The forecasted sales for 2014 in the European market are expected to rise by 3% which is a positive sign.
As the economy gradually recovers, it will be interesting to see who makes the most of it and swings back to profitability before the rest.
My take: The mass-market producers like Fiat will find it difficult to turn it around right away as it needs to be leaner still, while Ford and GM might finally see an upward surge on the back of some key right-sizing exercises.