Bloomberg News

Europe Fix for Auto-Industry Woes Hit by National Aims

December 05, 2012

French Jobless Fears Mean No Europe Fix for Auto Overhang

Citroen C3 automobiles, produced by PSA Peugeot Citroen, sit at Aulnay sous Bois production site in Paris. Photographer: Antoine Antoniol/Bloomberg

President Francois Hollande is intent on ensuring auto jobs stay in the country as unemployment continues to climb, even if that stands in the way of efforts to fix Europe’s ailing car industry.

Pursuing the so-called Made in France policy, Hollande’s government is preparing 7 billion euros ($9.2 billion) in loan guarantees for PSA Peugeot Citroen’s lending unit. The financial backing is being extended in exchange for greater influence, including a seat on the board, as Europe’s second-largest carmaker considers closing a factory near Paris and cutting 8,000 jobs.

France’s activist approach to industrial policy is an example of the national objectives that undermine steps to prevent cash-draining overcapacity in the Europe Union. While the mismatch between supply and demand is hobbling carmakers, no member state wants to pay the price for helping the industry back on its feet by facilitating factory closures at home.

“The main hurdle to a European strategy is that national temptations start rising,” Antonio Tajani, European Commissioner for Industry, said in a telephone interview. “But if we want to compete at a global level, the solution can only be European and not national.”

The tension between EU obligations and national interests - - at the heart of the sovereign-debt crisis -- is thwarting efforts to restructure the region’s auto industry as demand tumbles for the fifth straight year, prompting losses at most carmakers in Europe.

U.S. Fix

The region’s inaction contrasts with the U.S. response when sales plunged following the credit crunch in 2008 and 2009. Pushed by a government-appointed task force, the predecessors of General Motors Co. (GM:US) and Chrysler Group LLC closed 15 domestic factories and cut 45,000 hourly jobs. They now report healthy profits in North America and are rehiring people.

In a bid to coordinate a similar approach, the EU’s Tajani invited executives from the region’s carmakers to a meeting today in Brussels. The effort includes consultations with union leaders and politicians. The chances for agreeing on a Europe- wide plan look slim.

“My priority is ‘Made in France,”’ Arnaud Montebourg, the country’s Industry Minister, said in October. “There’s a choice that’s more important than any other and that is to preserve France’s industrial base.”

With Hollande’s approval rating declining every month since his May election and jobless claims at a 14-year high, backing off that stance is unlikely.

National Production

“There is no such thing as a European motor industry,” said Garel Rhys, president of the Center for Automotive Industry Research in Cardiff, Wales. “There is a common market on the demand side, but not in terms of production, where it is still based on nationality and national companies.”

The efforts to reach a broad consensus on restructuring of the auto industry comes as the region grapples with the debt crisis, which stems from member states flouting European budget rules. Measures to put the auto industry on solid footing could cost 500,000 jobs at carmakers and suppliers, according to Lars Holmqvist, the former head of the European parts supplier association Clepa. That makes for an unpalatable prospect for politicians seeking to stem rising unemployment.

Reflecting the difficulties of achieving a consensus, EU leaders also failed to agree on the 27-nation bloc’s next seven- year budget last month. The U.K. defended a decades-old rebate, while France clung to farm aid. Eastern and southern countries said reduced financing for public works would condemn them to lag behind the wealthier north.

French Loans

France’s backing of Peugeot isn’t an isolated case. The country provided the manufacturer and fellow French carmaker Renault SA (RNO) with a combined 6 billion euros in loans in 2009. At the same time, Germany backed GM’s Opel unit with 1.5 billion euros and sought to find a buyer for the carmaker. Germany, France, the U.K. and Italy also boosted sales during the credit crunch with cash-for-clunkers funds.

The support has meant that only two auto factories have closed since the crisis started in 2008. Current plans to shut another five factories fall short of the roughly 17 needed, according to Goldman Sachs.

In concrete terms, the European Commission, the EU’s executive body and the enforcer of the bloc’s rules, is proposing to roughly double funds for research and development in the auto industry to about 2 billion euros in the 2014-2020 budget. It also plans to simplify environmental regulations and tighten conditions on trade agreements, said Tajani. He was guarded on the Commission’s view on France’s support of Peugeot.

German Targets

“We’ll see what the effects and the actual decision will be,” said Tajani. “If there is a violation of the competition rules, we’ll see.”

In addition to diffences among member states, European carmakers aren’t all suffering. Volkswagen AG (VOW) and Germany’s luxury-car makers Bayerische Motoren Werke AG and Daimler AG’s Mercedes-Benz are gearing up for record sales this year on growth in China.

Peugeot, Renault and Fiat SpA (F), which don’t export from Europe to the same extent as their German rivals, are faced with a local market that’s about 20 percent below the 2007 peak. To adjust operations, Europe’s mass-market carmakers are lobbying for an end to government intervention to help wring concessions from unions and mothball capacity.

Ford Losses

“Individual companies need to make their own decisions as to how best to implement measures that will ensure their future business success,” Wolfgang Schneider, head of legal and governmental affairs for Ford Motor Co. (F:US) in Europe, said by e- mail. “What is important is that governments allow this to happen without the kind of national self-interest we have seen from some in recent years.”

Ford, which has forecast $1.5 billion in losses this year and next in Europe, has announced the furthest-reaching restructuring measures in the region. The U.S. carmaker will shutter two sites in the U.K. and one in Belgium as it sheds 5,700 jobs and 18 percent of its European capacity.

Even that may not be enough, with industrywide sales set to fall to their lowest level since 1995 this year. About 26 percent of European auto production is surplus to the industry’s current needs, according to research firm IHS Automotive.

Fiat Chief Executive Officer Sergio Marchionne, who also serves as president of the ACEA auto-industry trade group, has called on the EU to coordinate a regional effort to balance industry restructuring and check national aid efforts.

“Intervention by the French government to help one single carmaker, not done for us and for others, would be against” EU rules, he said Oct. 10 in Brussels.

Still, Marchionne’s backing of the process has its limits. The executive, who also runs Chrysler, isn’t attending the meeting with Tajani today because of appointments in the U.S., according to people familiar with his schedule.

To contact the reporters on this story: Alex Webb in Frankfurt at awebb25@bloomberg.net; Tommaso Ebhardt in Milan at tebhardt@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net

Citroen C3 automobiles, produced by PSA Peugeot Citroen, sit at Aulnay sous Bois production site in Paris. Photographer: Antoine Antoniol/Bloomberg European Commissioner for Industry Antonio Tajani said, “The main hurdle to a European strategy is that national temptations start rising.” Photographer: Simon Dawson/Bloomberg French President Francois Hollande, left, reacts beside PSA Peugeot Citroen Chief Executive Officer Philippe Varin, during a visit at the Paris Motor Show in Paris. Photographer: Philippe Wojazer/AFP/Getty Images Dec. 6 (Bloomberg) -- Martin Sorrell, chief executive officer of WPP Plc, discusses U.K. exports, growth markets and French business policy. He talks from New York with Guy Johnson on Bloomberg Television's "City Central." (Source: Bloomberg)

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