The euphoria over the positive first quarter results of the U.S.-based carmakers should be tempered by the recessionary situation in Europe, which could be further exacerbated by this week’s election of Socialist candidate François Hollande as French president. Hollande seems much less disposed than his predecessor to insist on so-called austerity measures in European governments, several of which are teetering on the edge of bankruptcy. There seems to be a sense of denial across much of the European populace that increasingly high levels of government spending are unsustainable and potentially disastrous.
Without a solution to the economic ills of several European countries — and the continuing threat that the deep recession presents to the viability of the European Union and the Euro — there is little likelihood of a strong European recovery and without such a recovery General Motors, Ford and Chrysler will continued to be hobbled even as their results in the U.S. show improvement.
The Big 3 have been hammered hard by the ongoing European recession, most notably by the 7 percent year over year sales decline through the first quarter of this year. In just the first quarter, Ford sustained a $149 million dollar loss on European operations while GM lost twice that amount. The losses are expected to stockpile due to a production problem that has been building for some time. Sergio Marchionne, CEO of Chrysler and Fiat has estimated that production may need to be reduced by as much as 20 percent to better accommodate current demand.
Reducing production capacity won’t be easy. There are numerous political challenges associated with factory closures in Europe, due in large part to the more than 2.3 million people employed by the auto industry and local governments strong support for labor unions. Similar to the U.S., workers must be paid even if production is idled leading to wasted capital in the worst case, and overproduction necessitating heavy incentive spending in the best case.
Something will need to happen soon. Even though things in the U.S. are looking up, American auto manufacturers can ill afford to continue hemorrhaging money in Europe.
~Jack R. Nerad, Executive Editorial Director and Executive Market Analyst, Kelley Blue Book and kbb.com and Alec Gutierrez, Senior Market Analyst, Automotive Insights, Kelley Blue Book.