With the backlash in Europe against austerity forcing the debate about the direction of government and monetary policy, the continent must choose its way forward, and that road will be a difficult balance of sacrifice and compromise.
For the continent’s automotive industry, which, according to the European Automobile Manufacturers Association (ACEA) employs about 6% of the EU’s workers in directly or indirectly related businesses, there is a no less difficult balance to be struck. Take France, the country which has propelled the centre left back into power with an emphatic “Non!” to austerity; while the new president may be keen to show his support for the French automotive industry by driving a Citroen DS5 Hybrid, Francois Hollande is likely to be a less enthusiastic supporter of the factory closures that PSA Peugeot Citroen desperately needs to consider to turn its fortunes around. Fiat struggled to close its logistically expensive Termini Imerese plant in Sicily last year, and with Italian elections in 2013, it may have more problems with restructuring in its home market. Meanwhile, GM‘s German arm Opel looks likely to follow the 2010 closure of its Antwerp plant with that of Bochum – a city in the German state which has just given austerity advocate Angela Merkel a pasting in recent elections. With the wind blowing in a very different direction, European OEMs may need to rethink how they restructure in Europe.
With the wind blowing in a very different direction, European OEMs may need to rethink how they restructure in Europe.
That, say analysts, could mean balancing profits from overseas with the high capex losses European automotive is experiencing, and will continue to experience, in its home markets if factory closures become more difficult. It is easy to see what stock watchers mean when you consider that while the world’s biggest OEM, Volkswagen, managed to double its Q1 European deliveries year-on-year, the increase was nearly fivefold in South America, according to the group’s Q1 report. Hence the domination of traditional European, US and Japanese OEMs in markets like Brazil where the attraction is more than just a cheaper place to bash their metal.
But such one-way bet growth hedges are becoming increasingly limited. The European automotive industry has looked to more difficult markets like China and Russia. Russia, with its rising middle class, has often been tipped to be Europe’s biggest car consumer. This clearly wasn’t lost on the Renault-Nissan Alliance when it decided earlier this month to invest €750m in a joint venture with AvtoVAZ.
European OEMs would do well to sit down with their new political masters to make sure new market hedges are not their only alternative.
But acts in haste against the increasingly desperate background of Western Europe’s automotive market could spectacularly backfire on any European automotive executive expecting a free ride in an underdeveloped market to hedge core market losses. Barely had the ink dried on the Renault-Nissan-AvtoVAZ deal before market sources told Mergermarket this month that they had deep misgivings about the deal’s two-year execution period; AvtoVAZ still owes the Russian government billions of Rubles from a bailout that kept the company afloat during the recent crisis, and the Kremlin does not have a track record of compromising on such issues. Add to that a Russian government view of Renault-Nissan’s involvement which is said to be that the company is no different from “hired foreign management executives” and it is not difficult to foresee problems.
Back in France, Germany and Italy, European OEMs would do well to sit down with their new political masters to make sure new market hedges are not their only alternative.
The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.
Thomas Williams is Mergermarket EMEA’s deputy editor and head of automotive. Christopher Kenneth is the group’s Moscow correspondent.
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