Europe's Flailing, Autos Failing
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Auto executives remember the wonderful days of 2007, when sales were humming along and all was well with the world. Those days are long gone.
The U.S. is still repairing, and the souring European consumer market is in rapid decline. Consumers of the 16 nations are spending less on a wide range of items ranging from groceries, where European households used to spend twice as much as American households, to automobiles. In fact, Europe saw a 6.8% decrease in the number of new car registrations in 2012, a bitter statistic for the profit-seeking auto sector.
In response, auto manufacturers Ford (NYSE: F), General Motors (NYSE: GM), and French PSA Peugeot Citroen have already announced profit-saving strategies. Massive layoffs are coming. The three firms plan to layoff as many as 15,000 employees, and each firm plans to close one European auto plant. Some plants are producing little and even sitting idle, creating a large cost center for the major autos.
The French Renault, for example, plans to temporarily trim its production at a Slovenian factory employing 2,000 workers. The moves add further tension and uncertainty to a region already plagued by economic troubles and unemployment.
Nissan (NASDAQOTH: NSANY.PK) CEO Carlos Ghosn forecasts that Europe will face a long-term slump in the auto market. He says that in Europe:
You’ll see more restructuring…everyone is going to do it following his own agenda and priorities. They (the government) don’t like it, which is normal, but at the same time they know the car makers’ attempts to safeguard the business is the only way forward.
Likewise, Fiat’s (NASDAQOTH: FIATY.PK) Chief Sergio Marchionne says that European auto makers “cannot maintain the same operating structure.” Ford, GM, and Renault have proved him right. Fiat did post a profit last quarter, but only because of the profits from its Chrysler unit, which have turned around as a result of a masterful marketing campaign targeting American spirit. To sustain profitability, Fiat must also cut costs.
Both Nissan’s Ghosn and Fiat’s Marchionne list a few ways to improve Europe’s struggles. First, Ghosn suggests that the government offer assistance. Hard times are certain to come, but he wants to see the government fostering growth, particularly in the alternative-fuel sector. This action could boost demand for a new wave of vehicles that would save consumers money from rising gasoline costs.
Second, Marchionne suggests that companies trim excess capacity. Cutting the car supply would boost prices and would also improve profits, as companies manufacture fewer products and therefore incur less in costs.
Finally, Ghosn calls for governments to better manage their exchange rates. He cites the strength of the yen as a detractor from growth in Asia – and a stronger euro is a detractor from European growth. To demonstrate how exchange rates affect profits, here is a fictitious example, using the euro:
Companies who sell abroad must convert their foreign currency back into the native currency. Assume that 1 euro equals 1 US Dollar (USD). An American firm sells its product for 10 euros, then converts the cash back into $10. Now assume that the USD has gotten weaker compared to the euro. Instead of a 1:1 ratio, the value is now 1.25, meaning that one euro buys 1.25 USD.
If the same American company sells 10 euros worth of merchandise in Europe, it then converts those Euros back into USD, making $12.50, an instant 25% profit.
In response to the currency issue, firms like GM and Ford have been moving operations from Europe back to the U.S. Last quarter Ford lost $404 million in Europe, and it hopes to ease the loss by going to a region with a weaker currency.
In brief, Ghosn expects the European market to be in long-term decline, and I do as well.
The goal for automakers operating in Europe must be to survive the famine time and hold out for the feast. In the future, sales will ring as they did back in 2007, before the crash, but the autos must first last the downturn to see another bull market.
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