Capacity utilisation rates will come under increasing scrutiny in Europe if the European car market stays sluggish

Capacity utilisation rates will come under increasing scrutiny in Europe if the European car market stays sluggish

There were certainly some eye-catching automotive products on show in Paris last week. It was a self-confident affair for Europe's finest, a shop window for an industry that has the capability to combine cutting edge technologies with creative energy and flair to dramatic and head-turning effect. And that's how it should be; that's what auto shows are really about.

I can still recall the unreal atmosphere of the Paris show of 2008. The banking crisis had just kicked off and there was a prevailing feeling of a crisis of unknown proportions ahead. And we were right to feel uneasy.

But now, two years later, the worst is behind us and the European auto industry is still very much around. There's a kind of business as usual even if underlying demand is way lower than it was at the height of the last boom. The effects of the severe recession that followed the international financial crisis will be with us for many years to come, but the European auto industry is still standing. In maintaining its survival it has been helped by higher business in the automotive growth markets of Asia and, to a lesser extent, South America. And there has been massive government assistance of one sort or another.

But here's the rub. Has there been much OEM industrial restructuring in Europe in response to much lower market volume? No. Overcapacity remains. For national governments, like companies, sectoral overcapacity is someone else's problem. You don't shell out taxpayers' money in soft loans only to see a car company shut a plant. Governments certainly don't want the economic and political grief that can flow from that.

At present, Opel's Antwerp plant and Fiat's Sicilian plant are about it on the planned car plant closure front. It's quite a big contrast with the restructuring that has gone on in North America where there is a long list of recently shuttered assembly plants.

Getting capacity utilisation up will likely be a serious issue for European carmakers in 2011 as Europe's car market languishes in the post-scrappage doldrums and export demand cools. Could it mean plant closures? The car companies may well want to rejig production to allow them to take fixed cost out through capacity reduction that entails plant closure. National governments (France, for example) may well put pressure on them not to do that. The car companies, in turn, may have to persuade governments that there is simply no alternative in terms of maintaining competitiveness and long-term survival. Let us manage, they may say, or we will slowly die.

So, yes, it is quite reassuring to see the new cars and concepts in Paris and reflect on the European industry's current circumstances compared with the worrying situation of two years ago. But the industrial capacity situation in Europe is likely to come under quite a bit of scrutiny over the next eighteen months if demand stays sluggish. There has been an industrial recovery from the lows of the severe inventory adjustment of early '09, but the effects of the unprecedented economic downswing that began two years ago will be with us for a while yet.