By Tommaso Ebhardt and Alex Webb - Dec 2, 2011 8:31 PM GMT+0700
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Car demand in Europe may decline for the fifth straight year in 2012 to 12.9 million vehicles, down 1 percent from this year and 17 percent from the 2007 peak. Photographer: Kostas Tsironis/Bloomberg
Dec. 2 (Bloomberg) -- For the first time since before the 2008 financial crisis, a European automaker will close down a production plant in its own country. Fiat SpA will close its Termini Imerese factory in Sicily, where the Lancia Ypsilon was made, at the end of the year. Poppy Trowbridge reports on Bloomberg Television's "The Pulse" with Maryam Nemazee. (Source: Bloomberg)
For the first time since before the 2008 financial crisis, a European automaker will close down a production plant in its own country.
Fiat SpA (F) will shutter its Termini Imerese factory in Sicily at the end of the year. The plant’s last Lancia Ypsilon subcompact rolled off the assembly line on Nov. 24.
The decision comes amid a growing car glut across the continent as most automakers continue to churn out vehicles in the face of slumping sales and growing concerns over the sovereign debt crisis and an economic slowdown in Europe. Overcapacity in the region may surge 41 percent to 2.92 million vehicles next year, according to forecasts from IHS Automotive.
“The global auto sector has been suffering for years from chronic overcapacity,” Fiat Chief Executive Officer Sergio Marchionne said last week in London. “In Europe, the situation has now reached suffocation point.”
The Fiat boss joined other auto executives, including Daimler AG (DAI) CEO Dieter Zetsche and Ford Motor Co. (F)’s European chief Stephen Odell, in a meeting in Brussels today to discuss the outlook for the auto industry with the European Commission.
The region’s auto lobby ACEA, which elected Marchionne as its president today, called on political leaders to act quickly to restore confidence in the region.
“One of my hopes is to find a will to achieve the economic stability in Europe, which will lessen the burden on the industry,” Marchionne said today in Brussels. “We need a healthy market” to be able to address the industry‘s “structural overcapacity.”
Five-Year Slump
Car demand in Europe may decline for the fifth straight year in 2012 to 12.9 million vehicles, down 1 percent from this year and 17 percent from the 2007 peak. Production in the region may slip 2.9 percent to 16.4 million vehicles, compared with a 1.8 percent increase in capacity to 19.3 million, IHS estimates.
Until the Fiat closure, European automakers had been unable to take bold steps to scale back production. Political interference has thwarted industry restructuring as governments propped up demand in 2009 with sales incentives and hindered efforts to trim capacity to protect local jobs. With strapped public budgets restraining the scope for aid, European mass- market automakers may face years of losses as idle workers and equipment cost money without generating revenue.
Marchionne’s decision to pull the plug on the 41-year-old factory in Sicily will cut capacity by as many as 140,000 vehicles a year.
‘Failure to Act’
Europe’s volume carmakers are the region’s worst performers. Fiat shares have posted the second-biggest decline on the Stoxx 600 Automobiles & Parts Index this year, dropping 41 percent. PSA Peugeot Citroen has posted the steepest decline, falling 49 percent, while French rival Renault SA (RNO) is down 34 percent.
“I doubt there is a single European player today that can make money on the strength of the European market alone,” Marchionne said last week during a speech in London. “The lack of a common intervention strategy in Europe, and a failure to act, has forced Fiat to find its own solution.” A new round of aid is unlikely.
“The probability of governments providing incentives is about zero,” said Christoph Stuermer, an analyst with IHS in Frankfurt. “There’ll be no backing” for a repeat of 2009 sales incentives, when Germany committed 5 billion euros ($6.7 billion) to boost demand by offering money to scrap old cars.
Interference
Efforts to prevent job losses continue. French President Nicolas Sarkozy, faced with an election in six months and the highest unemployment claims in more than a decade, summoned Peugeot CEO Philippe Varin on Nov. 17, asking him to reconsider plans to cut as many as 6,800 jobs, including temporary staff employed by partners.
Peugeot, Europe’s second-largest carmaker after Volkswagen AG (VOW), earlier this year distanced itself from a leaked proposal to close a French plant after the government described it as “unacceptable.” Renault CEO Carlos Ghosn pledged in May to make building upscale cars in France a priority in return for support from the government, which owns 15 percent of the manufacturer, to appoint a new chief operating officer.
“It becomes increasingly difficult to see any meaningful restructuring actions at PSA or Renault ahead of French elections in 2012,” said Erich Hauser, an analyst with Credit Suisse in London. Sarkozy’s meeting with Varin “illustrates once again just how hard it is to restructure industrial assets in France.”
GM’s German Woes
France isn’t alone in actively shaping its auto industry. German Chancellor Angela Merkel brokered the sale of General Motors Co. (GM)’s Opel unit, which is based near Frankfurt, tying state aid for the money-losing unit to a change in ownership. The deal fell apart when GM backed out in November 2009 after exiting bankruptcy.
GM, which hasn’t turned an annual profit in Europe in more than a decade, continues to struggle to turn around Opel. The company had $900 million in restructuring and early-retirement costs in Europe and cut 5,800 jobs in the region through Sept. 30. Last month, Detroit-based GM abandoned its goal of breaking even in Europe this year.
“When you’re running your plants at a utilization of anything less than 100 percent -- and in most of Europe they run at 85 percent -- you’re trying to bend the demand curve to meet the supply curve,” GM Chief Executive Officer Dan Akerson said at a Nov. 17 event hosted by the Detroit Economic Club.
No Profit Before 2014
Morgan Stanley estimates that European carmakers are utilizing about 70 percent of their capacity, with Renault, Opel and Fiat the least productive. The region’s mass-market carmakers may not return to a profitable rate of more than 80 percent until 2014, according to a Nov. 30 research note.
Before Fiat’s move to halt production in Sicily, GM was the only other carmaker to shut a factory since 2008, closing its facility in Antwerp, Belgium, at the end of last year. It was the first plant shut in Europe since 2006.
Fiat’s plans in Italy are aimed at ending losses estimated at 800 million euros a year, leading Marchionne to risk opposition. Fiom Cgil, Fiat’s biggest union, has called for a general strike on Dec. 16, its second in less than two months.
Workers at the Termini Imerese plant blocked the last car from leaving the factory until Fiat agreed with unions and the government on Nov. 26 to pay about 21 million euros to support early retirements for about 640 workers. Other staff will be hired by Dr Motor Co SpA, which will pay 1 euro for the plant and will continue to assemble vehicles there.
‘Great Attention’
Fiat, which has threatened to stop production in Italy, canceled labor contracts after withdrawing from Italian employers’ group Confindustria earlier this year in order to have a free hand in negotiating wage agreements. Talks on new Italian contracts started this week.
“The government is following with great attention” Fiat’s plan for Italy “and it’s ready to offer its constructive contribution,” Labor Minister Elsa Fornero said last week. “As a Turin citizen, I can’t stay quiet about Fiat. Big companies shouldn’t leave the country.”
To contact the reporters on this story: Tommaso Ebhardt in Milan at tebhardt@bloomberg.net; Alex Webb in Frankfurt at awebb25@bloomberg.net
To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net
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