As Wheels Come Off Car-Makers in Europe and U.S., Japan and South Korea are Primed to Expand Globally     Print

The impact on Europe of the “Big 3” U.S. automakers remains unclear. But it seems likely the numbers of car manufacturers will shrink and be consolidated into a smaller market – in Europe and in the rest of the world. Though, there may be light at the end of the bankruptcy tunnel for one-time U.S. giants GM and Chrysler. Both companies expect to emerge as leaner and meaner companies after shedding unprofitable brands and other assets – including many in Europe. In any event, the worldwide map of car making will be drastically changed, notably by the shrinkage and consolidation of this manufacturing sector in Europe as well as the U.S. It is a watershed moment for the global industry.

“The auto market in Europe has been ripe for some sort of shake-up for long time, but what we are seeing now is a current economic situation that is forcing European auto makers to re-organize or die,” Paul A. Eisenstein, Bureau Chief and Publisher of The Detroit Bureau, told European affairs.

As a result, an emerging view – also held by Eisenstein – contends that the only “winners” will be the Japanese and South Korean car makers. Despite losses, they are preserving their work forces and facilities. So they are primed for a recovery in the car-buying market.

In Europe, where dozens of U.S.-owned plants are being shuttered and jobs lost, the outlook is uniformly downbeat. Car-makers in Germany, Sweden, Britain (and presumably France) are available at fire-sale prices for groups with the cash to reinvent these brands. But the circumstances are strikingly different from country to country. In Italy, Fiat is taking a double-or-nothing gamble by taking over Chrysler’s slimmed-down operations in the U.S. If the planned deal goes through June 15, Fiat plans to re-tool Chrysler’s remaining American plants, mainly to introduce Italy’s now-proven energy-efficient technology to the American market (where it failed in a previous attempt to gain a foothold in the 1980s).

Fiat CEO Sergio Marchionne contends that a contemporary car-maker must sell 6 million cars a year – worldwide – to be viable. Initially, he was hoping to acquire that scale partly by picking up two other ex-GM European properties: Opel and Saab. But Berlin and Stockholm rejected his bids because they involved shuttering plants and adding to the jobless ranks. As consequence, it seems that Magna International Inc; an Austrian-Canadian auto-parts manufacturer and Sberbank of Russia will acquire both Germany’s Opel and Britain’s Vauxhall and become a new entrant in the car business. A key part of this “memorandum of understanding” was the bare-knuckled bargaining over government financing, between the GM board, Merkel and Obama teams.

Sweden’s Saab, another European orphan of GM, was in talks with Asian investors led by the Chinese automotive group, Geely – without agreement. Saab spokespeople have publicly said the group is out of the bidding. The company will not identify who the other potential suitors are but maintained they had “two or three” serious bidders, according to a Wall Street Journal article.

In France, state-owed Renault has lost sales to the point where it depends on its Japanese subsidiary, Nissan, to stay in the black. The situation is less clear for its rival, privately-owned Peugeot, but analysts predict that the French authorities will facilitate a merger between the two in a bid to ensure the survival of a “national champion” auto-maker.

Meanwhile Asian car-makers have been gradually building market share in both Europe and the U.S. These Asian car-makers already hold a 13% share of the car market in Europe and 4% in the U.S. In most Western markets, Japanese and South Korean manufacturers have enjoyed cost advantages because they were able to start new factories without incurring the “legacy costs” of the benefits allocated to the workforce during the boom years after World War II. These Asian companies – nearly a dozen of them now well established with customers in the U.S. and Europe — seem well placed for a growth spurt. Amid uncertainties surrounding the main Western car-makers, including technical bankruptcies for Chrysler — and, as now seems probable, for GM — will provide a window of opportunity for the Asian manufacturers to expand their customer base, especially in the U.S.

Overall car sales in Europe were down 12.3% in the month of April, according to the European Automobile Manufacturers Association (ACEA). Japanese sales were down an overall 28.6% and U.S. car sales fell 34%. In 2005 the U.S. sold 17 million new cars and light trucks a year, now barely 7 million new car sales are sold. In 2005 Europe sold 16 million new vehicles, now they are only selling only 1 million.

In Japan domestic sales of new motor vehicles with engines of over 660cc dropped 10.5 per cent in the first half of 2007 from a year earlier to a 30-year low of 1,788,440 units, the Japan Automobile Dealers Association said. The result for the January-June period represents a year-on-year fall for the second consecutive year and is comparable to the 1,742,109 vehicles sold in the first half of 1977.

As the auto carnage continues leaked estimates from GM project a loss of more than 4 billion dollars this year before tax and interest payments — most of it on Opel’s books.

“It demonstrates that you will need a lot of cash to run Opel,” said Arndt Ellinghorst, head of European automotive research with Credit Suisse in London.