European overcapacity is a myth - Europe Report - Brief Article

Automotive Industries, June, 2002 by Anthony Lewis

Overcapacity in Europe, often quoted as being at least 30 percent, is a myth. It's an excuse rolled out to explain factory closures or job losses. The real reason is bad management and poor product.

Ford and General Motors have had to close plants because they weren't producing sexy cars. Fiat, with aging Punto and lackluster Stilo, has announced up to 18 possible plant closures worldwide, but again, poor product is at fault.

In contrast, those with good product are adding capacity.

Toyota has its new Yaris plant in Valenciennes, northern France, and is now embarking on a joint venture factory with PSA Peugeot Citroen in the Czech Republic. BMW is putting up a new facility near Leipzig, Germany, while it has confirmed 700 new jobs for the Mini factory in the U.K. taking output from 100,000 to 125,000.

Peugeot is adding an extra shift and going to seven-day workweeks at its Ryton, U.K., plant which produces the 206, Europe's best-selling car. Honda has extended its factory, also in the U.K., which builds Civic, Accord and the CR-V.

Nissan started building the new Primera this year at its Sunderland, U.K., plant and will launch Micra at the end of the year. Installed capacity will rise to 500,000 cars a year, it currently builds around 330,000.

So what happened to overcapacity? "It was all a myth," said analyst Peter Schmidt of Auto Industry Data. A myth driven by political arguments to protect the dominance of domestic car makers, particularly in France and Italy, and to mask poor management and decision making over model mixes.

"At the beginning of the 1990s the European market hit 13.5 million and everyone, including me, said this was the limit," said Schmidt, "And this only because of the re-unification of Germany when everyone there rushed to buy cars. But the market has continued to grow to nearly 15 million. There never was overcapacity and in truth manufacturers have been struggling to cope with demand."

The new PSA-Toyota plant at Kolin near Prague will build an all-new small, affordable, fourdoor car for Europe, below the current Peugeot 106/Citroen Saxo, at a rate of 300,000 vehicles a year, which Schmidt endorses as exactly the right strategy.

He adds that all the future projections and all hard data tells us that as well as new markets in Eastern Europe and Russia, in Western Europe the second family car, so often a used one, is giving way to a new one.

"This is an untapped market and the demand for small, stylish and safe cars will grow, whichever way you look at it," Schmidt predicts.

Sharing the risk is also the right strategy, he said. "It is difficult to make money on small cars, but if you share the development costs the numbers begin to add up."

Schmidt said the new vehicle would put PSA and Toyota in a strong position while many automakers were struggling to come up with the right strategy for a small car. GM was quick off the mark tapping into the small Wagon R developed by Suzuki, despite doubts over its styling being right for Europe. GM builds its version, the Agila, at its Polish plant at Gliwice where it produced 82,100 units last year and plans more than 86,000 this year.

GM Europe also recognizes that it let things slip out of control.

"We had 2.9 million units installed capacity and we are now down to less than two million," said Michael Burns, president General Motors Europe. Closing Luton in the U.K. and big cuts at Bochum, Germany, and Antwerp, Belgium, removed 500,000 units of capacity. Each plant could build in excess of 400,000.

"When a plant gets too big it becomes unmanageable," Burns said. "you get to a point where you lose control. A plant with 1,500 workers can maintain flexibility, which a plant with 3,000 can't Running a village is one thing, running a small city is something else."

His blueprint? An efficient plant operates three shifts, five days a week and produces between 200,000 and 250,000 vehicles a year. "No product stays hot forever, so you need two products, ideally three years out of phase with each other, at each plant," he said.

A lesson to all, even if GM was late to the classroom.

European Union passenger car production 1995-2001


1995  12,636,067
1996  13,061,348
1997  13,451,272
1998  14,510,472
1999  14,993,470
2000  14,906,666
2001  14,934,855

Source: National associations/ACEA

This article was provided exclusively to Automotive Industries by

Interchange, a U.K.-based automotive business agency and consultancy servicing media and corporate clients. Anthony Lewis is a partner in Interchange and can be contacted via e-mail at ajlewis@compuserve.com.