Blog: Dave LeggettStrange times

Dave Leggett | 15 June 2009

There is something strange going on in the auto industry. Despite the talk of massive overcapacity, the impact of recession and the oft-heard conclusion that the industry will consolidate into fewer, bigger carmakers, the opposite seems to be happening.

Smaller brands – Hummer, Saturn, Saab, Volvo Cars - are being sold off by bigger groups and, apparently, finding no shortage of potential buyer interest.

And the deal that would have clearly signalled that consolidation in Europe is coming – Opel and Fiat – isn't happening. Not only that, but the new CEO at PSA – a firm often identified as a potential alliance or merger suitor for Fiat – has more or less said that size isn't everything and that PSA can survive as an international business by focussing on growth markets.

Is that it then? Consolidation and rationalisation of production isn't as pressing as some have been saying?

I don't think so. But it's also a more complex situation than it appears at first sight.

For example, if GM, with all its resources, couldn't make Saab work, why should anyone else? Fair question, but an alternative business model that recognises past weaknesses and that perhaps comes with a sizeable initial dowry of assets from GM, might just be able to work.

Similarly, in looking at Magna's proposed deal to acquire Opel/Vauxhall, the position of New GM is highly significant. If a close relationship continues across the Atlantic concerns over the new European entity developing new product ease somewhat.

I can't help thinking though, that with the industry's total volume pie in Europe suddenly quite a bit smaller, the overcapacity bullet will have to be bitten somewhere, sooner or later.

A lot has to transpire before we can see the extent to which the pain is shared. 

JD Power estimates that capacity utilisation at Europe's car plants currently stands at around 50% - versus 80% as recently as 2007. JD Power's baseline forecast has a return to an 80% capacity utilisation 'norm' in 2016. A rule of thumb is that car plants break even at 60-65% capacity utilisation.

There won't be much recovery to capacity utilisation from the current 50% this year or next on current market assumptions (in 2010 Europe's car market will likely decline after this year's scrappage-inspired boost).  Conditions are therefore clearly ripe for further capacity rationalisation.

Manufacturers who ignore these fundamentals impose higher costs on themselves and impair their ability to be competitive – a sure recipe for potential long-term decline and eventual exit from the industry.

ANALYSIS: The age of deconsolidation


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