Blog: Dave LeggettEurope's overcapacity: where will it give?

Dave Leggett | 21 September 2009

Identifying 'overcapacity' in the carmaking business can sometimes seem like wrestling with a jelly. It may be a collective problem for the industry, but addressing it happens at the company level and that's where things get tricky.

Firms will tend to have over-optimistic assessments of their own prospects and market shares. If you add up each firm's forecasts for its own volumes you inevitably get to an inflated total industry volume (TIV) or market. There is always someone else responsible for all the overcapacity.

While there has been plenty of action taken to reduce excess production capacity in North America, not much has happened in Europe yet. Actually, not a single plant has been taken out in this downturn and it is estimated by PwC that excess capacity in Europe in 2010 could reach 7m units.

That's a lot of expensive plant to act as a drag on profitability. Plants operating at 60% capacity utilisation or less lose money. And if some plants are enjoying a scrappage boom, it's a boom mainly in small cars – and they come with thin margins.

A big problem is that demand isn't quite coming to the rescue. Despite the temporary boost under scrappage incentives this year, the European car market will not be bouncing back to anywhere near 'normal' levels – that would arguably support the industry configured as it is - anytime soon.

The outlook for 2010 in Europe is for the car market to fall back. That will intensify pressures for capacity restructuring across Europe, however unpalatable.

Plants with low rates of capacity utilisation can only be carried for so long. The question is, if something has to give, where will it be? 

GERMANY: Europe needs more capacity cuts - Fiat chief


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