By Chris Reiter and Andreas Cremer
(Bloomberg)—An auto glut in Europe is forcing Volkswagen AG, Fiat SpA and PSA Peugeot Citroen to accelerate overseas expansion to make up for declining prospects at home.
Excess production capacity in the European Union amounts to 6.5 million vehicles, according to Calum MacRae, an analyst at PricewaterhouseCoopers. Western European deliveries reached about 15 million last year, so that's a surplus equal to almost half the market. GM Europe President Nick Reilly says sales may slump this year by at least 1.6 million vehicles.
"I don't think it's going to be a good year," Reilly said on Jan. 12 at the Detroit auto show. Sales in western Europe probably will remain "below levels of 2008 for three years."
GM's Opel division is considering expanding beyond Europe, Reilly said. Volkswagen, the region's leader, is building its first factory in the U.S. in more than two decades and agreed last month to spend about $2.5 billion for a stake in Japan's Suzuki Motor Corp. to gain a stronghold in India. Peugeot, Europe's No. 2, is weighing a tie-up with Tokyo-based Mitsubishi Motors Corp., while Fiat is developing cars with Chrysler.
"Europe appears to be a fairly saturated market," Christian Klingler, Volkswagen's sales chief, said in an interview at the Detroit show. "The more dynamic growth forces are unfolding in other parts of the world, for instance China, Brazil or India."
Deliveries in Europe will probably decline by 1.4 million vehicles this year as government sales incentives end, according to IHS Global Insight. That 8.5 percent slump may contrast with 2 percent global growth, the research firm forecasts.
"The European sector's dependence on scrappage schemes during 2009 has preserved an abundance of capacity," MacRae of PwC said in a research report this week. Countries such as Germany, France and the U.K. offered payments for consumers to turn in old cars and buy new models.
Wolfsburg, Germany-based VW's share of revenue generated in western Europe will likely decline to 41 percent in 2011 from 50 percent in 2007, according to a Jan. 11 research report by Credit Suisse.
VW, which wants to overtake Toyota Motor Co. as the world's biggest carmaker by 2018, needs to address the withdrawal of incentives because the three most-favored models under the German program were Volkswagen group vehicles, Credit Suisse analysts led by Arndt Ellinghorst said. VW's earnings before interest and taxes remain "overwhelmingly exposed to EU markets," he said.
Volkswagen sold 6.29 million cars and sport-utility vehicles worldwide last year, an increase of 1.1 percent from 2008. Declining European deliveries were offset by a 37 percent surge in China to 1.4 million vehicles.
The German carmaker predicts slight expansion in the U.S. this year, with any growth in global automotive sales led by China and Brazil, Klingler said. Europe's market may shrink by 1 million vehicles or more, he said.
In India, VW plans to double the number of workers at a new factory to 2,500 by the end of this year. It also aims to expand the distribution network in Asia's fourth-largest market to 120 dealers by 2012 from 14 in 2008.
"The crisis is the catalyst," said Mike Tyndall, an automotive analyst at Nomura Securities in London.
Daimler AG and Bayerische Motoren Werke AG, the world's top luxury-car makers, say deliveries in Germany, where each gets about one-fifth of revenue, may slump to the worst level since reunification in 1990. They're relying on a U.S. recovery and China's expanding market to drive 2010 sales gains.
BMW is investing $1 billion to expand a plant in South Carolina, and Daimler plans to shift some production of the Mercedes-Benz C-Class from Germany to Alabama.
Industrywide deliveries in Europe fell 2.8 percent to 13.4 million vehicles through November. The region's carmakers association will release full-year figures on Jan. 15.
The outlook in the U.S. is better, partly because of dramatic changes made in recent years, MacRae said, as GM and Chrysler Group LLC emerged from bankruptcy with government assistance, trimming jobs, closing weak brands and reducing benefits.
"Dramatic industry restructuring throughout every level of the value chain has delivered most surviving entities to a leaner and more agile state," MacRae said.
Carmakers are encountering obstacles to trimming the fat in Europe, where loans and government pressure to protect jobs have kept the industry from closing unneeded plants.
Renault SA's tentative plan to build a Clio subcompact in Turkey incurred the wrath of the French government, which owns 15 percent of the carmaker and granted it 3 billion euros ($4.4 billion) in loans last year. Industry Minister Christian Estrosi is demanding that Renault ditch the idea.
While Fiat CEO Sergio Marchionne was able to announce the closure of a plant in Sicily in December, government acquiescence came at the price of a commitment to increase output in mainland Italy rather than transfer it to low-wage economies.
Peugeot, which predicts a decline of close to 8 percent in the European car market in 2010, is in talks with Mitsubishi on cooperation and may take a stake in its Japanese partner. The French company gets more than three-fourths of its revenue from western Europe. Peugeot deliveries fell 2.2 percent in 2009 to 3.19 million vehicles, though Chinese sales surged 52 percent.
Domestic rival Renault has revived plans to add production in India, where it intends to introduce a car priced at less than $3,000, followed by other models.
"Compared to the crisis year 2009, investments will certainly rise, because carmakers can't hold such a low level if they want to remain competitive," said Georg Stuerzer, an analyst at UniCredit Bank AG in Munich.
China is the best answer, said Rupert Stadler, CEO of VW's Audi division. "The real growth in world car markets is being achieved outside Europe."
—With assistance from Cornelius Rahn in Frankfurt, Katie Merx in Detroit, Laurence Frost in Paris and Sara Forden in Milan. Editors: David Risser, Kenneth Wong.