Europe: Shall We Dance? Automaking rivals refine the buddy system

DaimlerChrysler AG may get all the ink, but it's the more conservative deals such as the recently announced PSA Peugeot Citroen/Ford Motor Co. diesel engine joint venture that are likely to have the biggest impact on the shape of the European auto industry.

Faced with increased competition from importers, tougher regulatory standards on the horizon and growing uncertainties over the global recession, local automakers are scrambling to rationalize assembly capacity and cut costs while continuing to punch out a raft of new products in this hotly competitive market.

Of course, collaborations such as the PSA-Ford diesel engine deal are nothing new in Europe, where more than a dozen local carmakers are fighting for a piece of a 14 million-unit market. In an effort to get economies of scale, Europeans have been linking up on component- and vehicle-sharing deals for years. Renault SA and Peugeot have been building engines together for more than a decade. And the just-launched Movano, Adam Opel AG's first commercial vehicle since 1975, is a result of a tie-up with Renault.

What's noteworthy about the PSA-Ford pact - in which the two will chip in FF2 billion ($357 million) for a family of sub-1.5L direct-injected diesel engines due around 2001 - is that in this era of the mega-deal, it goes only so far.

"We see no big mergers between automotive groups," says PSA Chairman Jean-Martin Folz, who believes future deals in Europe will continue to be more strategic than blockbuster. "You have to remember last May (when DaimlerChrysler was announced), the opinion was that you will see marriages everywhere in the not-too-distant future. What in fact happened? Nothing. Nothing happened because nothing makes sense.

"What does make sense is the actual preservation of the personality of the brands and products, and sharing development and production costs," he concludes. "It is what we start here today with Ford. Hopefully, we will be able to find other possibilities with other car manufacturers in the future. "

Echoing Mr. Folz is General Motors-Europe President Michael J. Burns, whose company recently announced a deal to develop a sub-Corsa sized car with Japan's Suzuki Motor Corp. Although the platform is expected to be used throughout the world, the microcar initially will be aimed at Europe, with annual production of 120,000 units each slated for GM's new plant in Gliwice, Poland, and Suzuki's Esztergom, Hungary, facility in early 2000.

"That's a good example of an alliance - they have a particular capability in very small cars," Mr. Burns says. "Together we can do more than we can separately. Those are the kinds of things you're looking for. Those kinds of partnerships are quite good."

Such tie-ups are part of the plant rationalization efforts that have cut an uneven swath across the industry. Volkswagen, for example, has been so strapped for capacity it is shipping right-hand-drive Golfs from its factory in South Africa to the U.K.

Conversely, several automakers are struggling in the U.K. Rover plans to cut 1,500 workers and increase use of overseas components from 15% now to 25%, all a result of the strong pound. And Ford, which recently idled 20% of its Dagenham, U.K., workforce due to slow Fiesta sales, now is casting some doubt on the future of its Halewood, U.K., plant, currently buildingEscorts but slated to switch over to small Jaguars in 2001.

"The pound is overv alued relative to other currencies," soon-to-be Ford Chief Executive Jacques A. Nasser points out. "We can build equivalent vehicles cheaper on the Continent than we can in Britain. Our bias is always in favor of British sourcing, but if the cost situation is un-competitive, we will have to re-evaluate."

Although it's too late for Nissan Europe to reconsider production of the new Almera sedan at its Sunderland, U.K., plant set for this year, the automaker says further investment in the country is uncertain.

"If the current strength of (the pound) continues, then clearly we would have to think about investment elsewhere for the future," Nissan Europe President Norio Matsumura tells the Economist Intelligence Unit. "If (the pound) weakened - by 10% to 20% - then we might reconsider the U.K."

Meanwhile, Opel, which not long ago cut 600 jobs as it took a shift out of the Russelsheim, Germany, plant, has had to add some 200 temporary workers because of Vectra demand. And a third shift is set to come on stream at the Bochum, Germany, facility to build the Astra-derived Zafira microvan. But there also likely will be more job cuts, as Opel constructs what Chairman Gary L. Cowger calls a "lean field" plant in Russelsheim, replacing the current two facilities there sometime after 2000.

Renault, which mothballed its Vilvoorde, Belgium, facility in 1997, is targeting some 2,700 staff reductions annually through attrition, but is planning no more plant closings as it moves to get productivity down from 19 hours per vehicle to less than 15 by 2000. Some analysts contend Renault will need to lay off 40,000 workers over the next five years if it isn't able to cut costs.

"We are using our capacity in a satisfactory way," counters Carlos Ghosn, Renault's executive vice president-research and vehicle and mechanical engineering. "At the same time, we still have some flexibility for growth."

Further pressure on indigenous European carmakers comes from the Asians, who are expanding transplant operations - already among the most productive facilities in Europe. Imports also will rise as restraints now in place in some EC markets expire in 2000. The impact will be felt most severely in countries such as France, where import quotas have held the Japanese nameplates to under 5% of the market, less than half their pan-European penetration.

The Japan Automobile Manufacturers Assn. says its members will produce more than 1 million cars in Europe in 1998, adding that could go to 2 million over time. Honda, which is shooting for a 2% share of the Western European market by 2000, says it expects half of that volume to come from its U.K. operation, which is getting a 450 million ($762.7 million) shot-in-the-arm to expand capacity 100,000 units by 2002.

And with Korea's Daewoo Motor Co. Ltd. and Japan's Suzuki operating plants in lower-cost Eastern Europe aimed in part at supplying the West, European automakers have even more impetus for making efficiency gains.

To counter that cut-rate competition, some are putting plants of their own in the East. Standard & Poor's DRI expects that by 2002 Eastern Europe will be producing more than 600,000 cars annually that otherwise would have been made in Western Europe.

Renault's Mr. Ghosn puts as positive a light as possible on the coming competition, saying Toyota's plans to put a 150,000-unit plant in Valenciennes, France, to build its new Yaris small car may help drive home a message to French workers. "People will see much more clearly that we're going to have to compete with these guys sooner or later," he says.

In addition to forays into the East, Western European carmakers are looking at international expansion as a longer-term way to counter any downturn at home. Fiat Auto SpA Chief Executive Roberto Testore says his company will rely on Europe to carry it through the global recession, but that all the surveys "tell us that by 2007 sales will be up over 50% on 1997 in Latin America, Eastern Europe, India and China."

On home soil, makers will continue to slug it out in the hotly contested small car market, led by the Fiat Punto, VW Golf, Opel Astra and just launched Ford Focus and Peugeot 206. But new segments also are emerging. Renault's monospace Megane Scenic has caught fire with consumers, and a host of competitors are bowing. The Citroen Picasso, unveiled at the Paris show in October, will hit the market in late 1999. It will be preceded by the Fiat Multipla this year and Opel Zafira in January. Mitsubishi's Space Star goes into production in the Netherlands later in 1998 and a Focus-based vehicle is due from Ford in 2000. DRI forecasts the microvan market to reach 600,000 units by 2001.

Says Opel's Mr. Cowger: "I think we'll see anywhere from 110,000 to 130,000 Zafiras next year, and then go beyond that in the year 2000. We're not ready to talk about the max yet, (but) I think we can go north of 200,000."

Other sectors also are expected to blossom, including the micro segment typified by the new VW Lupo, the upcoming Suzuki-GM car, Daimler-Swatch Smart car and Fiat Seicento, plus the Peugeot T-1 and Citroen C3, due post-2000. Renault is talking to Romania's Dacia about building such a car for Western Europe, as well.

"It's very much a product-driven market," says Mr. Burns, who has spent the first month in his new post as GM of Europe president driving Opels and competitive makes to get a feel for the market. "It's not a market that's for the average vehicle."

What lies ahead economically is anyone's guess. Some analysts worry European banks with ties to Asia - they suffer about four times the loan exposure as U.S. banks do - will leave the market vulnerable to the Asian flu sooner or later. Some sectors already appear to be softening, such as Italy, where government incentives that had propped up sales in the first half of 1998 ended mid-year, forcing temporary shutdowns at Fiat.

Still, forecasts remain mixed. DRI predicts sales to drop - most expect about a 13.9 million market this year - in 1999, but rebound to 14 million-plus years in 2001 and beyond. Citing a satiated replacement demand, a shrinking workforce and expected tight monetary policies as the result of the common currency switch to the euro, the EIU projects a decline in European sales to about 12.7 million yearly between 1999 and 2001.

But industry executives are keeping a positive outlook. "If you stick to basics, I don't see why the car market should deeply suffer from whatever is happening in Asia, Russia or Latin America," says Peugeot's Mr. Folz. "We see no reason why the market should collapse."

Says Mr. Burns: "We're cautiously optimistic for next year, but a lot depends on what happens in the last quarter."

Clearly, cost-cutting will have to continue. That means further pressure on suppliers for engineering work as well as price reductions.

And outsourcing also is on the rise. Ford, for instance, is selling off land surrounding its Genk, Belgium, Mondeo car and Transit van plant to the local government, which will help finance operations for 10-12 suppliers in a BF8 billion ($231 million) industrial park there. The suppliers will provide parts for a new Mondeo due in 2001 to Ford on a just-in-time basis into the plant. The move will allow Ford to cut its workforce by 2,800 mostly through attrition and early retirement programs. About 500 to 600 workers will move over to supplier plants. Ford officials believe the outsourcing shift will allow it to hold the price line on Mondeo while increasing content 10%-12%.

"We are the only Ford plant in Europe still making its own seats for Mondeo and Transit," says Alfons Smets, plant finance director.

There's also a movement - led by VW - to cut the number of vehicle platforms. Renault, for one, says it will go from six to just three in the next five years. And there will be continued environmental pressure. Last month, European automakers agreed to voluntarily cut vehicle carbon dioxide emissions by 25% over the next 10 years, meaning average fuel consumption will have to improve to 40 mpg (5.8L/100km) by 2008. Still unclear is what effect Germany's Chancellor-elect Gerhard Schroder's planned alliance with the Green Party may mean in further pressuring the auto industry.

"It's a tough market," concludes GM's Mr. Burns. "It requires you to be very efficient in what you do. You've got to be darn good. This market punishes people that are average, either through profitability or volume."