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Why Cyprus Will Push Europe?s Carmakers To The Brink Photo:
 
 
Tim O'Brien | Mar, 26 2013 | 15 Comments
  • Losses mount as European car sales plunge; major brands in peril
  • A ‘smaller’ European car industry inevitable by 2014

It's not the first time that matters in tiny Cyprus have had all Europe on a knife-edge. But this time at least the struggling Cypriot has the moral argument on his side.

And he, or she, may well ask why they should 'carry the can' for a banking sector made mortally ill by its own institutionalised greed, profligacy, poor judgment, poorer accounting and plain shonky dealing.

However, carry the can they will. The choice: to allow a plunder of larger deposits, among other pains, or total economic collapse.

Thanks to a teetering out-sized banking sector which had grown to more than 750 percent of GDP (having become a haven for Russian money), and which had borrowed heavily and lent heavily to Greece, Italy and other basket cases, Cyprus had no way out other than to accept the vials offered.

But these are dangerous times.

In forcing this plan on Cyprus, the European Central Bank (ECB) is waving a flame under fuses running into every bank in Europe.

The risk is that household depositors in the rest of Europe will see this as a 'test case' - a testing of the water by the ECB and something it may wish to repeat elsewhere: depositors paying for the sins of bankers.

If European households think there is any risk this ‘plan’ may spread to other jurisdictions, they may make a run on banks right across Europe rather than seeing their savings plundered.

And if there is a capital run, then the decaying leper that is the European economy, which everyday seems to report another festering body-part, and has literally seen its arse fall right of its pants, will really be in trouble.

Of course, having a moral argument on your side is of little use when no government anywhere seems prepared to bring to book those banks, directors, boardrooms and executives who collectively perpetrated a giant fraud on the world economy before bringing it to its knees when it all unravelled.

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That aside, more uncertainty in the minds of European consumers is the last thing the European car industry needs right now.

How bad is it for carmakers? In January 2013, less cars were sold in the once-powerhouse economies of Western Europe than at any time since collective reporting of registrations began in 1990. In case you missed that, less sales than in January 1990.

With 911,859 new car registrations in January 2013, sales across the EU were down 9.6 percent on a limp January 2012.

Bad? It was down again another 11.4 percent in February.

Historic lows of that magnitude do not pass like a ripple. It is now an endemic slide. And there is nothing to stop it.

The fumbling solution to the troubles in Cyprus, and whoever is next, will simply oil the rails.

What it means is that we will likely see the collapse of one or more European carmakers before the year is out.

And, absolutely certainly, and equally certain to feed the contagion, the closure of not one, not two, but a dozen or more European car manufacturing plants.

Burdened by structural problems, by labour market rigidities, by high-cost plants running at half capacity and less, and by too much protection and too much intervention, European carmakers will this year absorb - if they can - the fifth consecutive year of sales decline.

Accelerating the tailspin, and putting increased pressure on profitability, is widespread and haphazard discounting and buyer incentives as carmakers struggle to clear unsold stock.

Some, sitting on losses of hundreds of millions of dollars this year, on top of losses of hundreds of millions of dollars last year, and of the year before, will simply not be able to survive without massive restructuring - of the type perhaps only possible under bankruptcy protection.

Above: Fiat's ageing third-generation Punto.
Above: Fiat's ageing third-generation Punto.

Fiat's European sales have been plunging for five years. It is now clinging to the top ten in last place, bumped aside by BMW, Audi and Mercedes.

Most exposed to the debt-ridden economies around the Mediterranean, its Italian plants are reportedly now operating at 40 percent capacity.

Mr Marchionne's genius in rescuing Chrysler may yet in fact rescue Fiat.

Ford's European plants are reportedly at 65 percent capacity. GM’s Western European Opel plants are thought to be at similar capacity.

(GM four days ago announced plans to close its Opel plant in Bochum, after failing to win agreement with unions on its restructure, and is reportedly looking at closing its UK Vauxhall plant in Ellesmere Port.)

And so it goes.

Consulting group AlixPartners postulates that as many as 30 of Europe's 98 car assembly plants are operating at below 70 percent of capacity.

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Last year Ford of Europe lost US$1.75 billion; GM’s pretax losses (Opel and Vauxhall) were US$1.8 billion (and has, according to Bloomberg, lost $16.4 billion in Europe since 1999).

PSA Peugeot lost US$1.5 billion and has seen its market share fall to 11.4 percent.

The only major brands travelling somewhat unscathed at the moment are Volkswagen, and, perversely, the luxury brands: Mercedes, BMW, and Audi, thanks in large part to the strength of their international markets, China in particular.

So, what is the current position of the industry in Europe, and how does it compare with 2009? That latter year, you will remember, was headed for disaster until an outbreak of 'scrappage schemes' across Europe - from governments fearful of the total collapse of the industry - artificially propped up sales.

It was saddling itself into the luge for the downhill run then, and has been accelerating downhill since.

Following is the position of the top ten brands in Europe at year’s end 2009: (Source JATO Dynamics)

 

Top 10 Brands 2009

Make FY 09 FY 10 % Change FY
Volkswagen 1,640,451 1,553,332 +5.6%
Ford 1,288,367 1,216,247 +5.9%
Renault 1,087,712 1,082,871 +0.4%
Peugeot 989,170 995,184 -0.6%
Opel/Vauxhall 1,057,313 1,135,484 -6.9%
Fiat 1,009,623 943,164 +7.0%
Citroen 865,839 853,092 +1.5%
BMW 571,701 676,409 -15.5%
Toyota 705,172 742,860 -5.1%
Mercedes-Benz 587,895 683,435 -14.0%

For the full year, across all European Union countries, 14,357,808 new cars were sold in 2009, down just 0.7 percent on 2008 (thanks, in the main, to panicked scrappage schemes).

In 2012, new vehicle sales across Europe totalled 12,573,842. (Source JATO Dynamics)

Now have a look at the top ten brands in Europe at year’s end 2012, and consider the growing pool of red ink on so many of those company ledgers:

 

Top 10 Brands 2012

Make FY 12 FY 11 % Change FY
Volkswagen 1,613,913 1,687,846 -4.4%
Ford 953,174 1,095,609 -13.0%
Opel/Vauxhall 838,206 993,877 -15.7%
Renault 816,933 1,048,648 -22.1%
Peugeot 795,839 913,661 -12.9%
Audi 705,739 682,728 +3.4%
Citroen 674,688 773,472 -12.8%
BMW 641,378 641,964 -0.1%
Mercedes-Benz 598,301 594,479 +0.6%
Fiat 582,995 687,125 -15.2%

And if last year was bad, this year is dire: an annus horribilis in prospect for Europe’s carmakers.

Unfortunately, there are no rabbits left in any hats.

Each month the troubles drag on in the European economy, and with recession becoming an embedded fact of life across so many jurisdictions, then European carmakers face an inevitable reckoning of the type US carmakers faced in North America.

As casualties go, Saab is looking like a minnow. Short of a miracle, there’s at least one major train wreck in waiting among Europe’s troubled car makers.

Another Cyprus – or a galloping crisis of confidence in the banks and the safety of deposits – and more may be in peril.

Too many car companies, too many plants, too many Cypruses.

Tim O’Brien
TMR Managing Editor

 
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