Go East

Global auto makers this year are at a crossroads, grappling with both success and failure.

As Australia's industry races toward a third record-smashing sales year and Brazil hits new production heights thanks to rising export demand, China applies the brakes to its overheated market, stalling exuberant foreign transplants.

Western Europe, faced with growing competition from low-wage Eastern Europe, struggles with falling revenues, failed strategies, plant closings and resulting labor unrest. Ford of Europe finds itself beseeched by Prime Minister Tony Blair to reconsider the closing of Jaguar Cars' Browns Lane, U.K., plant. GM Europe plans to slash 12,000 workers, and Volkswagen in October faced down 30,000 workers protesting cost cuts.

Energy consumption, the escalating cost of raw materials, labor reform, currency inequities, environmental issues, falling tariffs and upcoming trade pacts challenge the international industry as it drives toward 2005.
— Barbara McClellan

Europe just can't seem to get a break.

Western Europe, the backbone of the region, can't shake the lackluster pace of the past four years that is forcing major restructuring by such giants as General Motors Corp., Ford Motor Co. and Volkswagen AG.

Plants are being closed and workers laid off, and labor unrest continues to escalate as old-school ways are being challenged to improve productivity and quality.

Add to that sagging consumer confidence, proposed radical pension reforms and stifling currency issues.

A strong euro is squeezing bottom lines and skewing product plans. Vehicles originally slated for the U.S. are being delayed or diverted. Pricing is an intricate dance. Manufacturing itself is being threatened, especially in the U.K., with the strong pound sterling torpedoing profitability.

The power shift to the East continues. Many former Eastern European nations joined the European Union in May, and it is becoming the region of choice for investment to tap its low-wage, skilled workforce.

Slovakia, where Volkswagen and PSA Peugeot Citroen recently committed to expansion including a VW-Siemens VDO Automotive AG wiring harness joint-venture plant, potentially could become the per-capita car producing capitol of the world within five years.

But the growth spike forecast for the East is not without cautionary notes. New tax structures could make vehicles more costly, impeding sales. And infrastructure needs for the 10 new EU members could put a strain on the rest of the states, which is the last thing the struggling West needs.

Another threat comes from the growing presence and success of non-European auto makers. Kia Motors Corp. is building its first European plant in Slovakia. Toyota Motor Corp., with six plants in Europe, is adding diesel engine ouput in Poland and vehicle assembly at a JV with PSA in the Czech Republic.

Addressing the mess in the West is crucial to European prosperity.

VW continues to self-destruct, with poor sales, weak products and dismal labor relations. The OEM says it wants to maintain its commitment to German workers, while seeking a 30% cut in personnel costs by 2011.

The recent hiring of former Chrysler Group executive and cost-reduction czar Wolfgang Bernhard to head the Volkswagen Brand Group is seen as a sign VW is ready to steamline its operations and boost synergies across its myriad brands.

GM Europe is biting the bullet. It is stanching profit bleed with plans to eliminate 12,000 jobs and $600 million from its European budget, and inciting the wrath of labor.

Ford workers are equally up in arms over plans to close Jaguar's Browns Lane plant in Coventry and overhaul operations at Land Rover's Solihull, U.K., plant. That is in addition to selling the Jaguar racing program and reducing salaried staff as part of the broad restructuring of Ford's Premier Automotive Group.

DaimlerChrysler AG ensured peace via an agreement with the powerful IG Metall union to reduce costs at its Sindelfingen, Germany, plant by nearly $612 million by 2007, preserving 6,000 jobs through 2012, but implementing necessary work-rule flexibility.

Lackluster Forecast

The drastic measures are necessary, with no signs of an uptick following nearly four years of passenger-car sales declines in Western Europe. Sales are on target to end only 2%-3% ahead of the 16.3 million units posted in 2003.

“One day it (the European market) has to come back. We always were expecting it to come in 2004 and now 2005, but I don't know,” an exasperated Juergen Hubbert, head of DaimlerChrysler AG's Executive Automotive Committee, tells Ward's.

The stalwart markets of Germany, France and Italy are causing most of the consternation. Germany is pacing down 1.5%, with sales of only 2.6 million units through September. The French market is staying above water, although barely, with flat sales of 1.8 million units through nine months. The story is the same in Italy, with sales up a mere 0.6%, for a total of 1.9 million units.

The few bright spots are Spain, up 11.7%, and the U.K., with a 1% gain.

Contrast that with the 33.7% sales spike in Central Europe, where 10 countries — Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia — became members of the European Union in May.

The European Central Bank (ECB) predicts the expansion will boost the economic clout of the region, with a population of 75 million and a gross domestic product of €413 billion ($496 billion).

Allowing these economies to become self sufficient will be a top priority, which could lead the European Commission to look the other way in enforcing policies that forbid member states from bidding against each other with incentives, such as tax reductions and direct payments to potential investors.

“Now these countries will be subject to the normal EU guidelines, and the EU will be casting its eyes over state subsidies for new plants,” says Nigel Griffiths, analyst with Global Insight. “The EU, however, will treat some of these countries much more leniently, because (it wants) them to be seen as fast growing economies.”

The euro region, (mainly Western Europe), is showing signs of economic progress, but rising oil prices and expected pension reforms are dampening business and consumer confidence, according to the International Monetary Fund (IMF). Confidence in the manufacturing sector has declined nearly three points through October, while consumer confidence has fallen nearly 13 points. Unemployment remains stuck at 9%.

“Far too many in Europe seem to have concluded that the good life and economic dynamism are contradictory terms,” says Raghuram Rajan, IMF's economic counselor and director-research department.

“The mood of people, of business, of everything is not good,” agrees Mario Canavesi, senior vice president-sales and marketing at Nissan Europe.

Exacerbating the problem is the strong euro. It has grown 8.9% in value against the U.S. dollar through September, on top of strong annual growth rates in 2002 and 2003.

On average it took $0.946 to purchase a single euro in 2002, when the currency was new. The rate shot up to $1.13 at the end of 2003 and now stands at nearly $1.26, the ECB says.

“Not too many people expected the currency to stay where it has been for this long a period of time,” DC's Hubbert says.

The inequity is proving devastating for European vehicle makers, whose No.1 export market is the U.S., and many are taking steps to insulate themselves.

Volkswagen reduced the number of vehicles it exports into the U.S. by 5% so far this year. Audi plans to divert up to 3,000 vehicles originally planned for the U.S. to other regions, “because it is not extremely profitable currently,” says Axel Mees, vice president-Audi of America.

Ford's luxury brands (Jaguar, Land Rover and Volvo) are posting a 5.3% decline in exports. Auto makers reporting significant gains in export levels, such as Porsche AG (up 14.2%) and BMW AG (12.3%), do so on the back of new products.

Ferrari Maserati SpA was forced to tweak its U.S. vehicle-launch schedules. The Ferrari F430 sports coupe was delayed a few months, and the auto maker waited until the last minute to announce pricing on its Maserati Quattroporte sedan. Maserati SpA CEO Antonello Perricone explains, “The problem is our company is a little company, and it is impossible to avoid the negative effects (of the weak U.S. dollar).”

Western Europe also is suffering from proposed reforms to government pensions and the labor market.

Workers face the prospect of longer hours for less pay to compete with the East and other developing nations for manufacturing and high-skill jobs.

Italy, France and Germany are under intense pressure to reform their pension systems. The IMF says they must look at changing payment formulas and eligibility requirements to keep the pension systems healthy.

Looking ahead, the IMF predicts the euro region will see 2.2% growth in 2005, led by France (2.3%), Spain (2.9%) and the U.K. (2.5%).

Germany and Italy, however, could remain problem areas, posting growth rates of 1.8% and 1.9%, respectively.

But Jean-Claude Trichet, ECB president, remains optimistic for the coming year. “The growth momentum seen in the euro area,” he says, “should be broadly maintained in the coming quarters.”
— with Alisa Priddle