DETROIT – European auto makers risk a “death spiral” in the region without trimming capacity to meet currently depressed sales volumes,’ top international executive tells WardsAuto.
“If you overproduce, it never has a good ending,” says GM International Operations President Tim Lee, who also sits on the supervisory board of the auto maker’s Adam Opel unit in Europe.
“Overproduction yields discounting, discounting yields poor margins and a death spiral. We have no interest in that,” he tells WardsAuto at last week’s North American International Auto show here.
European auto executives have estimated the region’s excess capacity at some 3 million units annually.
Opel, which GM has been trying to restructure since emerging from its 2009 U.S. bankruptcy, was hit particularly hard by the European sales slump. According to WardsAuto data, industry sales in the region declined 5% last year, while deliveries for Opel, excluding its sister Vauxhall brand in the U.K., tumbled more than 15%.
Opel has racked up $3.8 billion in losses since GM exited bankruptcy.
GM last year laid out a plan to revive its German arm by 2015. It includes several new vehicles and engine lines over the coming years, as well as a new marketing strategy for the brand, a cost-cutting alliance withPeugeot Citroen of France and exporting products into markets outside Europe.
A key element of plan, which Germany’s strong labor union endorsed last year, also includes shuttering Opel’s Bochum facility after production of the current generation Zafira multipurpose vehicle expires at the end of 2016. It employs 3,100 people.
Opel spokesman Johan Willems confirms today the plan for Bochum remains unchanged. However, the auto maker is in labor negotiations with all of its German plants seeking a wage freeze until the unit returns to profitability.
“If we are not able to make a deal, we fall back to the existing agreement,” Willems tells WardsAuto in an e-mail.
The current pact keeps a lid on layoffs only until the end of 2014, which could open the door for production adjustments at Bochum earlier than planned.
“Our intention is very clear, we want a deal that keeps Zafira until 2016 in Bochum,” Willems says.
According to published reports out of Germany earlier today, labor’s IG Metall trade union rejected the wage freeze on grounds it would remove Opel from an industrywide pay structure.
Lee says it could take upwards of seven years for sales volumes in Western and Central Europe to return to the levels witnessed before the global financial crisis began in 2009. At this point, he says GM is satisfied with the actions it has taken to address overcapacity but suggests more must be done industrywide.
“There is still this excess capacity,” he says, stopping short of calling on other auto makers to make cuts.
In addition to Opel,, and PSA have announced capacity reductions in Europe. , the region’s sales leader, says it will not close any assembly plants, although it has made production adjustments.
Labor laws that differ by each individual country in the European Union, such as the industrywide wage increases in Germany, can limit the ability of an auto maker to execute production adjustments. But only to a degree, Lee says.
“Nothing is impossible” he says. “It’s just whether or not the management has the willpower to face up to the brutal facts.”