Tuesday, August 21, 2012

Auto Manufacturing in Europe Just Illustrates How Serious the Problems of Europe Are – And How Much Better The U. S. Dealt with the Issue

A U. S. Success Story Not Possible in Europe

The recovery of the U. S. auto industry is part technical and part policy.  The technical part refers to the fact that (a) the United States transportation system is built around the personal auto use and (b) the age of the cars in the U. S. had become so old that replacement was necessary.  In short, because U. S. citizens depend upon the auto for basic transportation needs, when the old car gives it up it must be replaced.  So after falling for several years the U. S. auto industry is now selling at a very high rates.

The second factor that resulted in a recovery of U. S. auto manufacturing was government policy.  In a truly bi-partisan effort, the Bush administration started the process of saving the auto industry and the Obama administration finished the job.  When partisan feelings have ebbed (in about 150 years) objective historians will be able to list the auto industry policy as proof that government industrial policy can work.

The comparison between the U. S. experience and the experience in Europe is startling.  Because of its recession and because of national policies in various countries to support their local auto manufacturing, Europe has too much capacity.

Western Europe’s car market is, overall, in its fifth year of falling sales. But in some markets, such as Britain and Germany, sales are slightly up so far this year, whereas in Italy they are down by 20% and in France by 14%. Apart from the huge and efficient VW, the mass-market carmakers are worst hit: premium brands such as BMW and Land Rover are enjoying strong export demand from emerging markets. Peugeot’s compatriot, Renault, is also struggling with sinking sales, though it has moved faster in taking production out of high-cost France.

Given how much restructuring the rest of European industry—including the makers of car parts—has undergone, it is remarkable how few car factories have closed. The only significant closures since the financial crisis have been one apiece by Fiat (in Sicily) and Opel (in Belgium). Aulnay would be the first French car-assembly plant to close in 20 years.

The problem is that while Europe is integrated economically, it is not integrated politically.  As a result no country wants to absorb the impact of closing auto factories and the resultant unemployment.

When Peugeot said earlier this month that it would cut 6,500 jobs and close its Aulnay factory near Paris, President François Hollande insisted that its plan “will not be accepted”. However, his government’s promised rescue package for French carmaking, announced shortly after Peugeot revealed its losses, was feeble: bigger subsidies for electric cars; loans for small suppliers; but nothing that will make a real difference.

Italy is having similar problem, revolving around Fiat.  And since Germany is doing well they have no incentive to take any leadership role in fixing the problem or spreading the pain over the various countries where auto manufacturing is a major industry.

Because the U. S. and Britain are self contained, they were able to suffer the pain early, absorb the political impact and now their car industries are in pretty good condition. 

The motor industry in Britain and, more recently, in America has endured the pain of deep cuts and is now profitable and expanding. After the 2008 financial crisis President Barack Obama and his “car tsar”, Steven Rattner, oversaw a restructuring in which GM and Chrysler were pushed through a rapid bankruptcy and, between them, American carmakers closed 18 factories. Now AlixPartners reckons that car plants in Britain, America and Germany (despite Opel’s troubles) are working at well above the level needed to make profits, whereas those in France, Italy and Spain are in the red.

The forecast for Europe is not good.  Since no country will cut capacity in the auto industry, the glut will continue, the losses will continue and ultimately the cost of fixing things will rise substantially.  See, in some cases the U. S. does do things correctly, in spite of what politicians claim. But don't feel too comfortable.  If Mitt "Let Detroit Go Bankrupt" Romney is in power the U. S. can soon experience what it is like to be Italy, Spain or France.  Kinda ironic, isn't it?

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