Sunday, June 24, 2012

European Auto Plants Leading the Way in Europe’s Economy – Leading the Way to the Bottom Unfortunately

No European Economic Recovery for Decades – That Could be the Headline

Why Europe’s Auto Industry is Different from the U. S. And Not in a Good Way

The key word in describing Europe’s economy these days is not growth, it is not greater employment and it is not future prosperity.  The key word is survival.  The average family in Europe other than in Germany and a few other smaller countries these days is looking solely for economic survival,  maintaining of basic living standards.  This is almost certainly going to be impossible.

Case in point is the devastation that the continuation of the Great Depression (after a short interval of false recovery) is having on the auto industry in Europe.

All told, auto makers here are selling about 20% fewer cars than they were in 2007, leaving many with mounting losses and far more plants, workers and production equipment than they can keep busy.

"Europe is a mess," John Hoffecker, a managing director at AlixPartners a consulting firm with a large automotive practice, said this week in an interview.

Powerful labor unions and most European governments fight efforts to close plants because of the jobs that are lost. As a result, auto makers keep their factories open but cut their hours and assembly-line speeds to reduce production. About 30 of the 98 European auto-assembly plants owned by major car makers are operating below 70% of their capacity, levels that typically cause plants to run up significant losses, according to AlixPartners.

The interesting question from an economics point (which we here in the United States can ask since we are not affected by the economic conditions of this critical industry in Europe and can view these issues as 'interesting' and not as 'devastating') is why the United States has seen recovery in its auto industry, and Europe has not.  The answer would seem to lie largely in the different nature of the transportation systems in the two continents.  North America’s transportation system is auto driven;  people in the U. S. use the auto as the basic form of commuting and for shopping trips and for vacation trips. 

When the family car or the business car is worn out, it must be replaced, and given the level of driving the wearing out thing happens quickly.  Because U. S. auto sales dropped significantly in the Great Recession, it was only a matter of time before auto sales had to recover.  Transportation is a necessity.

In Europe mass transit facilities and inter city rail transportation is much more prevalent.  European commuters and vacationers have alternatives to the auto, and they use them.  Furthermore Europe has a higher degree of diesel automobiles than the U. S. and their longevity is very high compared to the U. S.  High gasoline prices also discourage driving in Europe.  The result, European can allow their auto’s to age when economic conditions require postponing the new car purchase.

All of this is just another example of how the austerity programs in Europe are counter productive.  By cutting personal income they cut personal consumption, which means a decrease in the demand for things like autos, a result that is surprising only to European policy makers.  As for implementing policy, about the only suggestion is to spread the misery. 

Fiat and Chrysler Chief Executive Sergio Marchionne has been calling for concerted action by the European Union and European auto makers to reduce excess capacity.

"If we draft a plan that spreads the capacity reduction over all the countries involved, it seems to me it is easier to sell it," said Mr. Marchionne, who is currently serving as president of the association of European auto makers, known as ACEA.

but spreading misery does not reduce it, it just spreads it.

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