US rescue inspires Euro Plan B

2012-09-04 11:26

PARIS, France - Europe's volume carmakers are returning from summer breaks with their sleeves rolled up, ready to shut plants and lay off staff in what many see as an overdue push to cut costs as their US counterparts did three years ago.

In 2009, when the United States rescued General Motors and Chrysler from bankruptcy on condition they close plants and slash jobs to rebuild profits, European governments responded to a slump in vehicle sales by offering car firms aid to do the opposite - maintain employment levels in the hope of a swift recovery.


Three years on, and with no sign of an end to a European economic crisis that has crushed demand for cars in core Mediterranean markets, French and Italian makers, along with GM's German Opel unit and Ford's regional division, face less resistance from politicians and labour unions as they present cuts as an alternative to risking outright collapse.

Governments, including the newly elected Socialists in Paris, no longer have funds to rescue companies. Philippe Houchois, a London-based auto analyst with UBS, said: "They can't just prop up sales again, because there's no underlying demand and they're too broke anyway."

And some union leaders are calculating that cuts now can save more jobs later - though few expect workforces, which have in some cases already been substantially eroded, to take plant closures quietly.

But American auto consultant David Cole said he expected major restructuring to get under way as Europeans faced the choice to "sacrifice a battalion in order to save a division".

"Everybody has decided this is the right time to make structural changes," said Cole, a former head of the Centre for Automotive Research in Ann Arbor, Michigan. "When they see that a company could disappear with all its jobs, they may realise it's better to lose 20%."

Laurent Petizon, a Paris-based director for consultancy Alix Partners which advised GM on its state-aided turnaround, said factory closures were no longer the "taboo subject" they were when the industry faced the first wave of crisis after 2008. "There seems to be a growing realisation that overcapacity needs to be dealt with."


Three years after the drastic cuts demanded by US President Barack Obama's administration in return for public cash, GM and Chrysler are reporting strong earnings, even with the US market still below pre-crisis levels.

Global No.1 GM, which shed four brands, 14 US plants and 21 000 jobs, posted a record profit of $7.6 billion in 2011, while Chrysler netted $183 million under new parent Fiat after a similar tightening of its belt.

In Europe, where the industry was barred from closing factories in return for billions in state loans, scrappage bonuses and other life support subsidies, most mass automakers now appear locked in a downward spiral.

PSA Peugeot Citroen, Renault and Fiat - along with Ford in Europe and GM's Opel - are struggling to stay profitable and in most cases are failing.

Peugeot is leading the losses, and the charge, with plans to cut more than 10 000 French jobs and carry out the country's first car plant closure in two decades.

Fiat, which shuttered one Italian plant in 2011, has warned it will close another unless it can build vehicles competitively for US export.

Renault has been careful not to rule out cutting capacity. Four months before Peugeot's announcement, Renault CEO Carlos Ghosn had predicted that any significant restructuring move in Europe would "force all carmakers to do it".

GM may also order deeper cutbacks after ousting Opel chief Karl-Friedrich Stracke in July, 2012. Stracke had reached an outline union deal to extend a moratorium on firings until the likely closure of Opel's Bochum plant in 2017.


The politics have not stymied all change. European governments have often "looked the other way" as companies have shrunk plants and headcount by attrition, said Ron Harbour, a managing partner with consulting firm Oliver Wyman.

Renault's French headcount fell 9.6% in the three years to 2011, and Peugeot's shrank 7.6%. Fiat, however, barely dented its domestic workforce of nearly 63 000 despite being the only European maker to close an assembly plant.

In all cases, the softly-softly approach has failed to keep pace with a 13% Western European market decline over the period. Harbour said: "They've just been kicking the can down the road, but they're getting to the end of the road."

From similar overcapacity levels in 2007, when auto plants on both sides of the Atlantic were producing about 85% of maximum output, surviving US plants have stepped up to 90% while Europeans sagged to 74%, AlixPartners says.

The averages mask contrasts: two in five European plants are running below 75%, deemed the minimum profitable rate, while Volkswagen's factories are close to full tilt. The laggards are concentrated in Italy, France and Spain.

Higher restructuring hurdles, from bankruptcy law to labour protection, also mean European cutbacks will never match Detroit's for depth or speed. Still, the US example is too recent and, so far, successful to ignore.