Global Crisis Catches Up With Europe in Year’s Second Half

Special Report

2008 Year in Review

The storm that was gathering over the European market in late 2007 hit – and hard – in 2008’s second half, forcing auto makers across the continent to rein in production and find ways to cut costs, as demand took a sudden downturn and profits quickly came under pressure.

Western Europe officially slid into recession in the year’s final quarter, and passenger-vehicle sales fell 7.8% to a 15-year low of 14.7 million units.

Not surprisingly, the outlook as 2009 gets under way is anything but good.

“In my view, it is going to be the toughest year ever,” Fiat SpA CEO Sergio Marchionne predicted earlier this month.

GM’s Forster: “There must be an end to the uncertainty for consumers.”

France’s Renault SA suggests industry sales could drop as much as 20% this year.

“I hope that my vision is pessimistic, but we have to prepare Renault for this possibility,” Chief Operating Officer Patrick Pelata told French newspaper Le Parisien in November.

Forecaster CSM Worldwide is equally bearish, however. It predicts sales will tumble 12.4% to 12.0 million units this year, from an estimated 13.6 million in 2008. Following the market’s poor showing in December, J.D. Power and Associates lowered its 2009 forecast to 11.39 million vehicles, which would make it the worst performance since 1993.

Production will decline by similar rates, as slumping domestic sales, plus a deteriorating outlook for the U.S. and emerging markets, takes its toll on European factories.

“The recovery from the expected low point of 11.3 million units in 2009 will be slow and drawn out, as economic activity will improve at very moderate pace across Western Europe,” says Mark Fulthorpe, director-European vehicle forecasts for CSM. “Output levels will begin to rebound in 2010, but because the short-term decline is deep and protracted, the long-term recovery will be slower to materialize.”

Putting Western Europe in the vise was the credit crisis that began in the U.S. with the collapse of the subprime mortgage market and rolled over the rest of the world like an unstoppable tsunami.

Although auto makers were wary of a number of potential demand-crimping clouds on the horizon heading into the year – including unfavorable exchange rates and the specter of tougher carbon-dioxide regulations, 2008 began well enough for most.

Through the first-quarter, industry sales in Western Europe’s 18 markets were pacing a more modest 2.6% behind like-2007, with several auto makers boasting solid results. BMW AG deliveries were up 10.9% in the quarter, with Daimler AG (6.1%), Nissan Motor Co. Ltd. (32.1%) and Mazda Motor Corp. (5.3%) all ahead of year-ago.

Perched on the leading edge of the softening market were Fiat Auto Group (-4.4%), General Motors Corp. (-8.3%), Ford Motor Co. (-5.5%) and Volkswagen AG (-2.7%), though no one envisioned the steep decline that lay ahead.

But by the end of November, only a single car maker, Nissan, remained on the plus side in sales, and even its margin on like-2007 results had eroded to less than 1%.

As consumer confidence buckled under the one-two punch of high oil prices and the credit crisis, auto makers began to take action. Spain appeared to be one of the canaries in the coalmine, as sales plunged 41% in the month of August and a series of production cuts soon began cascading out industry-wide.

But other key markets began to domino down as well. Germany suffered a 10.0% drop in August sales, and demand nosedived 20.9% in the U.K. in September.

In October, General Motors Europe President Carl-Peter Forster appealed to European governments to take action to restore consumer confidence and boost industry sales.

“In view of the gloomy market developments in Spain, Great Britain and Germany, there must be an end to the uncertainty for consumers,” he said. “The high oil and energy prices are hitting the middle class to the bone.”

Ford’s Fiat-built Ka among new models that bowed in 2008.

Auto makers again took to the knife, slashing production schedules across the continent. Renault shut many of its plants for several weeks in December and said it ultimately would eliminate 6,000 jobs across Europe.

On the sideline of the Paris auto show, Renault CEO Carlos Ghosn told reporters he couldn’t guarantee a market rebound would happen in less than two years.

“We don’t know if we are at the start of the end or the end of the start,” he said.

Goldman Sachs concurred, forecasting European sales would drop to 11.2 million in 2010, before rebounding slightly to 11.5 million in 2011.

Nissan sent 3,500 workers home for an early Christmas break in December’s second week. Porsche AG cut production in the year’s final weeks and gave up on its target of surpassing the previous fiscal-year’s sales mark. BMW, which already had slashed 8,000 jobs in 2008, let go some 400 temporary workers at its Leipzig, Germany, factory in November.

Daimler CEO Dieter Zetsche warned that as many as 100,000 jobs could be lost industry-wide as a result of the global downturn and forecast his company would produce 150,000 fewer vehicles than originally planned in 2009. Moves were being made to reduce the workweek to 30 hours with a corresponding cut in wages.

No job cuts at Daimler were planned, in part because a labor deal in Germany prohibited any such action before 2012. In fact, in October, the auto maker signaled it would add more than 1,000 employees worldwide in 2009, including creating 500 new positions at its Stuttgart headquarters.

PSA Peugeot Citroen announced in late November plans to trim 2,700 of its 114,000 jobs in France, as it looked to reduce output roughly 25%.

“Massive production cuts will be made in the fourth quarter as it is vital that we are correctly positioned to face 2009,” noted PSA CEO Christian Streiff in October.

Among the biggest auto makers, Volkswagen appeared largely alone as it vowed no drastic action would be taken to corral output. But that stance proved temporary as the weeks wore on.

“The worldwide situation has impacted the group,” Jochem Heizmann, a member of VW’s board of management in charge of production, told reporters in Berlin in October. “But we’re using our flexibility possibilities (to adjust production). We are curtailing extra shifts, reducing overtime and (extending) some holiday (downtime).”

In late November, reports surfaced VW was mulling plans to extend the holiday shutdown at is gigantic Wolfsburg factory from mid-December to mid-January and considering closing part of the plant even earlier in December. This month, VW scheduled more downtime for February at its Audi factory in Ingolstadt, Germany, and throughout the year at its SEAT SA operations in Spain and plants in Portugal.

BMW reportedly is taking 38,000 cars out of its 2009 schedule, slating downtime at four German plants in February and March due to sagging sales. GM Europe also announced more production cuts this month.

With the slumping markets taking a bite out of revenue and lack of available credit hampering cash flow, European governments began to talk of market stimulus and bailout packages for the auto industry.

Adam Opel GmbH, for one, was openly lobbying for a shot in the arm from the German government, which in November agreed to examine the potential for loan guarantees and a stimulus package to encourage owners of vehicles more than 10 years old to trade in on a new one. But VW, Daimler and BMW also had their hands out for what was seen as a potential E50 billion ($64 billion) in financial aid from the German government.

EU Industry Commissioner Guenter Verheugen said the collapse of Opel could trigger a domino effect across the entire industry.

Nissan chose Geneva as site to unveil Nuvu electric car.

“If one big car maker disappears from the market, there will be a knock-on effect all down the line,” he told the Associated Press.

France announced Nov. 25 it would launch an economic-stimulus package within 10 days that President Nickolas Sarkozy said would include “a revival plan to save the car industry.” In January, the government came through in part, granting the financial arms of Renault and PSA each €500 million ($659 million) in low-cost loans.

The Swedish government pitched in SK28 billion ($3.4 billion) in auto industry aid in December, but said it would not purchase Volvo Car from Ford or Saab Automobile from GM. Both arms were put on the market late in the year, in part a result of U.S. government pressure to shore up their operations prior to any federal bailout funding or lines of credit.

This week, the U.K. added to the pot, pledging to guarantee more than £2 billion ($2.8 billion) in loans to support the auto industry.

As if the financial crisis wasn’t enough of a worry, the European Union finally closed in on long-awaited standards for limiting CO2 emissions, which will force auto makers to market more fuel-efficient vehicles.

In mid-December, the European Parliament approved regulations that would cut CO2 emissions in new vehicles 18% by 2015. The new standard calls for a 3-year phase-in that will see auto makers required to average 130 g/km with their fleets between 2012 and 2015.

In 2012, 65% of the fleet must meet the 130 g/km standard. The target increases to 75% in 2013, 80% in 2014 and 100% in 2015.

The phase-in pleased auto makers, and to compensate environmentalists a new long-term target of 95 g/km is being eyed for 2020.

Penalties for missing the bogey would be €5 ($7) per car for the first gram per kilometer above the target, rising to €15 ($20) for the second gram per kilometer, €25 ($33) for the third and €95 ($125) for the fourth gram per kilometer and above. Beginning 2019, auto makers will have to pay €95 for each gram per kilometer exceeding the requirement.

To achieve the targets across the European fleet, auto makers will have to meet specific individual targets based on the weight of the vehicles they sell. Fiat is on the low end of the scale, at 122 g/km, while BMW and Daimler top the list at 137 g/km.

The European Commission estimates it will cost €1,300 ($1,700) per car each year through 2015, with analysts at A.T. Kearney and Credit Suisse pegging the cost to the industry at $25 billion per year.

European auto makers enjoyed some relief from currency exchange rates in 2008, with the euro hitting its low for the year of $1.249 in October, making exporting a bit more profitable than like-2007 when the currency traded at $1.426. However, by the end of 2008, the euro had climbed back to $1.409.

The short-term softening didn’t deter Volkswagen from pursuing plans to set up production capacity in North America., which it says it needs to hit its growth targets of 6.6 million VW-brand vehicle sales globally and 800,000 units in the U.S. by 2018.

VW already was well on its way to wrapping up preparation of the Chattanooga, TN, site in October, with a target of completing the plant in late 2010 and launching production of a new sedan in 2011. Although it initially will import engines and transmissions for the new cars, VW continues to have medium-term plans to add powertrain production in North America.

The auto maker continues to explore bringing Audi output to North America, as well, possibly having the luxury car maker share capacity with the VW brand at the new Chattanooga facility. A decision is to come in mid-2009, executives said earlier this month.

Conversely, Renault, a one-time suitor of GM and once rumored a potential buyer of Chrysler LLC, in November put aside any ambitions of a U.S. leg for its Alliance with partner Nissan, citing the uncertain market and deteriorating economic conditions.

Those factors were taking their toll on other auto makers, as well.

BMW saw its stock take its biggest dive in seven years after it reported second-quarter income dropped 33% to €507 million ($790 million). Moving quickly, CEO Norbert Reithofer announced plans to cut production 20,000 vehicles, raise prices and redirect some 40,000 cars that had been bound for the flagging U.S. to other healthier markets.

In July, Daimler cut its earnings forecast for the year 10%, noting, “The influence of high raw-material prices, rising inflation rates, falling purchasing power and tight capital markets are likely to prevent a significant revival from taking place in the coming months.”

Fiat, which warned it would have difficulty surviving the downturn without a partner, forecast profits could fall 85% in 2009 and closed its Italian plants from mid-December to mid-January in an effort to rein in inventories. Reports surfaced PSA might be interested in a tie-up late in the year, and those rumors continue to persist following Fiat’s surprise tentative tie-up with Chrysler in the U.S.

Under the deal struck this month, Fiat will take a 35% equity in Chrysler in exchange for providing vehicle technology. Chrysler’s distribution channels likely would pave the way for a return of the Fiat and Alfa brands to the U.S., and its North American plants potentially would be used to build vehicles for the Italian auto maker.

Not among the downtrodden is Porsche AG, the tiny sports car maker that has swallowed up control of giant Volkswagen. In November, it reported a group profit of €6.39 billion ($8.43 billion) for the 2007-2008 fiscal year, a whopping 51% gain on prior-year’s results.

Eastern Europe and Russia continued to provide some relief for auto makers suffering at the hands of sagging Western markets, but not as much as in the past.

In Russia, Ford shut down its Focus car plant near St. Petersburg from Dec. 24 through Jan 21, 2009, as a result of the slumping market that saw Focus demand reportedly plunge 30% in October.

Although still a growth market, Russia’s pace of expansion was expected to slow from 36% in 2007 to 20% in 2008 and 15% in 2009, according to a forecast from Moscow’s VTB bank.

The Czech Republic was caught in the economic downturn in the year’s second half, reporting auto exports had fallen 15% in October, part of an overall slump that saw industrial production in the country decline 7.6%.

Czech-based, Volkswagen-controlled Skoda Auto a.s. was forced to shut down most production for nearly a month during the holidays and said it would go to a 4-day workweek in the first half of 2009 as it cut production from 700,000 units planned for the year to 570,000. Staff pay is to be trimmed to 75% of average monthly levels during the first six months of the new year, though the auto maker wasn’t planning any cuts in its work force that numbered more than 20,000 people.

Goldman Sachs projects Eastern European vehicle sales will fall to 2.3 million in 2009, from 2.9 million in 2008. Demand will rise to 2.4 million in 2011, the firm predicts.

Suppliers also were beginning to suffer the impact of declining markets both in Europe and the U.S. and the uncertain futures of GM and Chrysler. In mid-December trading, such stalwarts as Faurecia SA, Europe’s biggest supplier of vehicle interiors, Valeo SA, France’s second-biggest parts maker, and Autoliv Inc., the world’s largest supplier of airbags, saw double-digit declines in their stock prices.

“The auto-parts production system will face serious disruption if GM and Chrysler go bankrupt,” Anders Trapp, an analyst at SEB Enskilda in Stockholm, told Bloomberg. “If just one of the majors goes under, even healthy suppliers will go bust, and some parts could simply become unavailable.”

Sweden’s AB SKF, the world’s largest supplier of bearings, promised to cut 2,500 jobs, some 6% of its workforce, as the downturn in the automotive sector spread to other industrial segments.

Auto makers fought the downturn with several key new product introductions in 2008, with Volkswagen’s revamped Golf; Ford’s new Fiesta and Fiat-built Ka; Renault’s Megane and Laguna Coupe; and BMW’s flagship 7-Series among the new models.

In addition, Fiat began laying the ground work for three new low-cost models and hinted it may launch an all-new brand in Europe to market the cars due in 2010. The location for production of the vehicles still hasn’t been decided, with plants in Poland, Serbia and Italy all said to be in the running.

Known as Project 326, the new line will debut with a hatchback in 2010 to replace the Palio. An Uno replacement will come next in 2011. The third car, which would be derived from the current Seicento, is expected in 2011 or 2012.

And for the first time, serious industry-wide interest in hybrid and electric vehicles began to surface.

BMW, Daimler and Audi released or were on the verge of rolling out their first hybrid production vehicles as 2008 wound down.

Nissan unveiled its Nuvu concept electric vehicle at the Paris show in September, while partner Renault began a big push for EVs of its own, with plans to sell 20,000-40,000 in 2011 and top 100,000 units in 2012. First up, Renault said, will be an electric version of the Megane in 2011. That will be followed by a purpose-built, electric city car in 2012.

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