Europe Faces Uphill Climb

Heading into 2010, Europe's auto industry finds itself on top of the heap — the scrap heap.

Auto makers and suppliers are not abandoning the business; just catching their breath after myriad trade-in programs in the region boosted sagging sales.

But from this vantage point, it's easy to see the landscape is being altered permanently.

Recession-induced restructuring portends change at Adam Opel GmbH, which consistently has ranked among the market's volume leaders. Meanwhile, consumer confidence is flagging.

And against this backdrop, demographics are undergoing a seismic shift. Says International Automotive Components Group founder and Chairman Wilbur Ross: “Globalization will change where cars are made and sold.”

Long-term, globalization does not favor Europe. But in the interim, industry stakeholders are calling for a second round of scrappage incentives as a bulwark against plummeting demand.

As Western Europe approached year's end, the industry recorded 9.8 million light-vehicle deliveries, compared with 10.9 million for the first eight months of 2008, according to Ward's data.

But that 10% disparity was lessened by a string of three consecutive incentive-sparked monthly upticks that began in June.

“We are maybe a little bit more optimistic and confident,” Audi AG Chairman Rupert Stadler says in Frankfurt. “Nobody knows how fast the acceleration will restart. Even if there are small growth patterns, mentally it would help us a lot.”

“We're beginning to see the bottoming out of the volume decline,” adds Fiat Automobiles CEO Sergio Marchionne. “It's fair to say that the worst is past.”

Western Europe's patchwork of 12 scrappage programs gave consumers taxpayer-financed rebates if they traded in older, fuel-thirsty vehicles for new, greener models. The results added volume and contributed to a fleet transition.

“In the last two years, the segmentation in Europe shifted even more to very small cars,” says Thomas Hausch, Chrysler Group LLC vice president-Europe, Middle East and Africa. But the scrappage programs “drove a huge surge” in A- and B-segment vehicles.

In Germany, sales of these vehicles accounted for 340,000 of 425,000 registrations linked to the country's scrappage program, Ross says in Frankfurt.

Arguably, no auto maker benefited more than Fiat. As consumers used the incentives to help them downsize in the face of economic uncertainty, Fiat says buyers were attracted to its core-brand 600, Panda, 500 and Punto; the Lancia Ypsilon and Alfa Romeo MiTo.

Fiat and Volkswagen AG were the only major European OEMs to post gains through August, but Fiat's 1.5% sales jump vs. like-2008 was triple that of VW.

However, Marchionne isn't popping any champagne corks. In a disclosure that reflects the industry's cautious mood, he cites a single vehicle — the successor to the Alfa Romeo 147 — when asked to list the auto maker's 2010 product introductions.

“No big news,” Marchionne tells journalists and analysts in a third-quarter news briefing. “We made a decision to postpone a lot of these launches because of the weakness in the market. These launches would have been fundamentally ineffective.”

Underlining his support for more scrappage programs, he suggests trouble is ahead for Germany, where the government has been cool to the idea.

“We (anticipate) a dramatic reduction of volumes in Germany in 2010,” Marchionne says. “That's built into our forecast.”

Without more scrappage incentives, Ross warns demand for new vehicles in the European Union could decline by more than 1 million units next year.

With 2009 Western Europe sales tracking at a full-year rate near 14.7 million units, the region could see its 2010 market reduced to 13.7 million — an 11.0% plunge from 2008's 15.4 million, according to Ward's data.

For this reason, Ross has called for a coalition of industry stakeholders. Its aim would be to lobby governments to establish a standardized scrappage incentive that would succeed this year's patchwork programs.

But the region has more pressing concerns than incentive plans.

Europe, along with the U.S., has been a dominant feature in the industry's global environment. “This will change,” Ross says.

Europe is home to 255 million people of driving age, less than two-thirds the total for India and well under half the number in China. And the driving-age population in these emerging countries grows “vastly faster” than it does in Europe, Ross adds.

“More importantly, Western markets are 25 to 30 times more saturated than China and India, so Asia has much more potential for further market penetration,” he says.

Combined with 2009's grim economic news, the climate in Europe is “sobering,” concedes Jurgen Friedrich, CEO of Germany Trade and Invest. But he also sees hope for recovery.

“During a recession, money returns to its rightful owner,” Friedrich says, citing a time-honored Wall Street adage. “And so, in many ways, Germany and its production base, its manufacturing base and especially its innovation-based technologies are going to play a crucial role in economic recovery.”

He points to sustainable technologies, in particular, as a key hedge against the eastward flight of jobs and money. While longstanding research into automotive applications for hydrogen is ongoing, companies such as Evonik Industries AG's Saxony-based Li-Tec unit are on course to produce enough lithium-ion battery packs to equip 100,000 electric vehicles annually.

Li-Tec already has been tapped as a long-term supplier for Daimler AG EVs, beginning with an electric version of the Smart Fortwo.

And, if trends hold true, such production could be performed more economically in Western Europe than in years past. The region has seen labor-cost rates decline in the face of rising quotients in Eastern Europe, according to data from Germany Trade and Invest.

Germany, Italy and France have recorded the lowest labor-cost hikes on the continent. Between 2000 and 2008, their annual average labor costs rose 2.0%, 2.7% and 3.4%, respectively.

In contrast, Slovakia, Poland and the Czech Republic have seen the highest average annual labor-cost increases — 8.4%, 7.5% and 7.2%.

The average increase across the EU is 3.7%.

On the productivity front, Germany Trade and Invest data show Japan and Germany — in that order — as the only countries to record unit-cost decreases in recent years.

Europe also benefits from considerable goodwill, according to an Ernst & Young “attractiveness survey” assessing investor attitudes toward regional economies.

For 2010, Western Europe inspires the most confidence among would-be business investors, followed immediately by China and North America, the survey says.

Governments' willingness to intervene in industry, an attribute dubbed “flexicurity,” often is viewed as a “handicap” in robust economic times. But in a recession, government sponsorship of programs such as scrappage rebates not only stimulates consumer spending, it creates “a social and politically stabilizing role,” the survey says.

There are exceptions. Opel Supervisory Board Chairman Carl-Peter Forster, who is shepherding Magna International Inc.'s partial acquisition of the brand from GM Europe, laments a double-standard.

When France this year made available €9 billion ($13.5 billion) to relieve struggles at Renault SA, PSA Peugeot Citroen and the nation's supply chain, there was a minor uproar, Forster tells a recent gathering of the American Chamber of Commerce in Germany.

“A week later, the whole story was gone,” he adds. But when Germany's government was tapped for a fraction of that amount to facilitate the Opel deal, which has yet to close, “it was a public drama almost every day,” Forster says.

Within hours of the tentative deal's approval by GM's board, Magna announced some 10,000 layoffs at Opel. Critics point to Magna's partnership with Russia's OAO Sberbank, which is linked to auto maker OAO Gaz Group. But without the Russian companies, Opel's future is questionable, Forster warns.

While Germany arguably is the center of Europe's auto industry — through June its vehicle production totaled 2.4 million units; more than twice that of nearest-rival Spain — Russia is an enigma that cannot be ignored.

Just three years ago, it was touted among the fastest-growing regions on the planet. But the global recession has wreaked havoc on the Russian market.

Through the year's first three quarters, sales of new cars and light commercial vehicles in Russia plummeted 51%, compared with year-ago. That amounts to 1.1 million fewer deliveries, according to the Association of European Businesses Automobile Manufacturers Committee.

Its rank among European vehicle producers also slipped. Through the first six months, Russia ranked eighth in output, producing just over 341,000 vehicles, according to Ward's data.

In full-year 2008, Russia built nearly 1.8 million vehicles — good for fourth place behind Germany, France and Spain.

The depressed economy has driven Russian consumers to lower-priced vehicles, particularly Lada models offered by domestic maker OAO AvtoVAZ, which in October was on the brink of bankruptcy.

The Russian auto market still faces a tough uphill climb, says David Thomas, chairman of the AEB Automobile Manufacturers Committee.

“September showed a very slight stabilization compared to August, but some of this is to be expected given the end of the vacation period,” he says.

Longer term, however, Eastern Europe has the potential to bounce back, according to the Ernst & Young survey. Along with Central Europe, it tops the list of most attractive regions for investment over the next three years.

“The economic downturn is unlikely to stop the global center of economic gravity (from) moving east,” it says. “(But) Europe is considered — by risk-averse investors — to be the most attractive business location today and ranks ahead of China in its perceived ability to overcome the economic crisis.”
— with Byron Pope