In announcing the impending closure of the General Motors plant at Antwerp, the senior management stated that prevailing market conditions were such that there was excess capacity in the industry in Europe. More significantly, the company went on to say that market growth is unlikely to return in the foreseeable future.
Putting aside the issue of whether GM Europe needed to switch the discussion away from the company’s own problems to those in the industry at large, the admission that markets in Europe are essentially stagnant marks a crucially significant stage in the developmental history of the automotive industry.
the admission that markets in Europe are essentially stagnant marks a crucially significant stage in the developmental history of the automotive industry
The automotive industry was not entirely blameless for the rampant expansion of demand that occurred in the ten years from the mid-1990s. The OEMs were willing participants in the credit finance boom that fuelled spiralling house prices, surging consumer debt and of course increased new car sales. With the onset of the global financial crisis and the recourse to government aid, the industry further lost contact with what might be termed the true underlying level of demand in the market.
In turn, this poses a crucial dilemma. Nobody knows what the real level of demand is: or to put it another way, nobody knows how far new car sales will fall once all the incentives are dissipated. Traditional forecasting is of limited utility in these circumstances, at least until a new equilibrium is established.
In this respect the statement from GM Europe marks a more significant issue than at first appears. It is an admission that the market in Europe is essentially saturated in volume terms, with replacement demand but no organic growth, and is likely to remain that way.
Indeed, even without consideration of the purely economic dimensions of this lack of demand growth, it is clear to the external observer that there is a growing restraint on car ownership and use in many locations in Europe. Moreover, whatever the prospects for electric vehicles and other alternative technologies over the next few years, they will come in at a higher cost than existing vehicles and are extremely unlikely to stimulate a new surge in demand.
whatever the prospects for electric vehicles and other alternative technologies over the next few years, they will come in at a higher cost than existing vehicles and are extremely unlikely to stimulate a new surge in demand
The implications are profound. Volume growth for any OEM in Europe can only come at the expense of a reduction in the share of a competitor. Similar conditions prevail in Japan, and seem likely in North America. Revenue growth can only come via increasing the value per unit, or capturing a higher share of other income (service, maintenance, etc.). Forward planning on market share and aggregate changes in demand is going to be much more difficult, placing an even greater emphasis on production flexibility and market responsiveness.
Inevitably, the major OEMs will redouble efforts at winning volume growth in those markets that still have such prospects, most notably those in China, India, Brazil and elsewhere outside Europe. But the real challenge is going to be making money in those mature saturated markets. It seems that we have truly entered a new era.
Dr Peter Wells is a Reader at Cardiff Business School, where he is a Co-Director of the Centre for Automotive Industry Research and leads the automotive industry research programme within BRASS, also in Cardiff University. Dr Wells is also a director of AutomotiveWorld.com’s sister website AWPresenter.com. He can be contacted on firstname.lastname@example.org.
The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.