Boom here, bust there

 by I.C. 

FOUR years on from the bankruptcy of two of Detroit’s Big Three, America’s carmakers are going at full throttle. Sales in August hit an annual rate that, if sustained, would take them back over 16m—a level last reached before the economic crisis and 80% higher than in 2009, when General Motors and Chrysler went into bankruptcy. GM has nine of its surviving 17 factories in North America working three shifts round the clock, more than it has ever had.

The opposite is true in Europe, now in its sixth year of slump. A weak economy, high petrol prices and an ageing population are weighing heavily on all mass-market carmakers. This has caused widespread losses and increased over-capacity—leading to price cutting, which has made matters even worse. By contrast, America enjoys economic recovery, a more youthful population, low fuel costs and, a result of the closures forced by the bankruptcies, capacity more in line with demand.

European (EU, plus Norway and Switzerland) car sales are running at about 12.2m units this year, nearly 4m below their peak in 2007. Nor is there any sign that things will get better soon. IHS Automotive, a forecaster, thinks that by 2020 sales will have recovered only to 14.7m. Moody’s Investor Services calculates that PSA Peugeot Citroen, Fiat and the European arms of GM and Ford will make combined losses of nearly €5 billion this year.

Fiat’s European losses are sustained only by its healthy business in Brazil and by its stake in booming Chrysler in America. Renault depends heavily on its partnership with Nissan and sales of cars built in low-cost factories in Romania to cover losses in its domestic business. Mercedes and BMW are making healthy profits across all their product lines, but Volkswagen—despite a leading share of the European mass market—needs to rely on its luxury Audi brand for about 60% of its profits.

European manufacturers have been slow to close factories because labour laws, notably in France and Belgium, make this a glacial and expensive process that incurs the wrath of government. But PSA and Renault are finally getting round to cutting jobs and excess capacity. Renault says it will reduce its French workforce by 7,500 (17% of the total) by 2016. Paradoxically, the only European bright spot is Spain to which car companies are once again switching production: wages are falling and labour laws were relaxed because of the country’s acute economic crisis.  

Yet industry watchers say that Europe’s car market is unlikely to bounce back to previous levels. City-dwelling Europeans are learning to do without owning cars, preferring to use public transport or vehicles that can now even be hired by the hour. Industry research finds signs of car ownership declining even in car-mad Germany, particularly among young people. No wonder experts are predicting a wave of factory closures to be announced next year. /economist