United States of Europe Needed for Obama-Style Auto Fix

President Barack Obama’s re-election bid today in part is a referendum on the government-backed auto- industry restructuring. Win or lose, his administration’s work on the U.S. auto industry is held up as a model for Europe.

General Motors Co. (GM) and Chrysler Group LLC’s pre-bailout predecessors were hamstrung by too many plants staffed with workers clinging to costly wage-and-benefit packages. In 2008 and 2009, when the automakers received $80 billion from the Bush and Obama administrations, GM and Chrysler closed 15 domestic factories, reduced U.S. production capacity by 33 percent and cut 45,000 hourly jobs in the process.

While many communities suffered the pain of the cuts and the industry’s rescue was a divisive election topic, GM and Chrysler -- as well as Ford Motor Co. and foreign rivals -- now report healthy North American profits and people are going back to work. That has led to calls for a government-led intervention in Europe, where new-vehicle demand is set to tumble for the fifth straight year and slump to its lowest level since 1995.

“Finding the will and determination to create a united Europe is essential,” Sergio Marchionne, chief executive officer of Italy’s Fiat SpA (F) and Chrysler, told reporters last month in Brussels. “We saw the same story in the U.S. in 2008 and 2009.”

Of the continent’s three biggest automakers, only PSA Peugeot Citroen (UG) has marked a plant for closing. Current plans by automakers to shut five factories fall far short of the roughly 17 needed, according to Goldman Sachs Group Inc.

Closings Resisted

Automakers remain hobbled by unused production capacity as national governments resist plant closings to protect local jobs and unions fend off major changes to compensation and work rules. Paris-based Peugeot, the No. 2 carmaker in Europe, lost 662 million euros ($847 million) at its auto operations in the first half. Fiat’s mass-market brands reported an operating loss of 573 million euros in the region through September. GM and Ford (F) forecast losses in Europe until mid-decade.

“As we look across the industry, we really don’t see anybody making money in Europe today at all,” GM Chief Financial Officer Dan Ammann said in an Oct. 31 interview on Bloomberg Radio. “The industry has to restructure.”

By contrast, GM’s and Ford’s North American operations earned a combined $11.95 billion in pretax profit this year through September, the companies said last week, pushing their shares to the highest since April. Fiat-controlled Chrysler, which generates almost all of its revenue in North America, reported $4.1 billion using its measure of operating profit.

Like 2009

“Europe feels and smells like the U.S. in 2009,” said Gerald Greenwald, a former Chrysler Corp. vice chairman and co- founder of private-equity firm Greenbriar Equity Group LLC. “The same fix is needed, and that is shrinking capacity.”

The U.S. restructuring provides a “road map” for Europe, said Arndt Ellinghorst a London-based analyst with Credit Suisse. A centralized task force could remove the “first-mover disadvantage” of companies that bear the cost of shutting factories only to help competitors by easing the burden of overcapacity, he said.

While that would be an effective method, it isn’t very likely, saidSteven Rattner, who ran the Obama administration’s automotive task force.

“The chance of a bunch of countries that can’t agree on anything agreeing to delegate the responsibility to solve this problem and the authority to implement it is approximately zero,” Rattner said in an e-mail.

Limited Moves

The hurdles to factory closures have limited the amount of restructuring in Europe. Just two factories have stopped production since Europe’s auto contraction started in 2008: a GM facility in Belgium and a Fiat plant in Sicily.

Five more plants are due to be closed in the coming years. Peugeot, which secured as much as 7 billion euros in backing from the French government to shore up its financing arm, plans to close a factory near Paris in 2014. Last month, Ford said that it will close two plants in the U.K. and a third in Belgium beginning next year. GM plans to shutter a factory in Bochum, Germany, after 2016.

Still, these shutdowns won’t be enough, according to Stefan Burgstaller, a London-based analyst with Goldman Sachs. He estimates that plants capable of producing 4 million vehicles a year need to be closed to restore the industry to stable profit margins. That would represent 18 percent of total production capacity, or the equivalent of about 17 of the region’s 96 assembly plants, according to a Nov. 2 note.

Restructuring Politicized

In the U.S. presidential campaign, both Republicans and Democrats have sought to use the job done by the Obama administration’s automotive task force to win votes. For the Democratic incumbent, it was about saving America’s industrial base. For his Republican challenger, Mitt Romney, it’s an example of government’s unnecessary interference in the economy.

“It’s a shame” to see the U.S. auto rescue become such a partisan issue, said Harry Wilson, a member of the task force and a Republican supporter of former Governor Romney.

“The Democrats take credit for it, the Republicans attack it,” Wilson said in a Sept. 6 interview on Bloomberg Television. “The reality is GM had its most profitable year ever last year. That is objectively successful.”

GM and Chrysler’s closures in 2008 and 2009 were spread across eight states, including the sites of key races in today’s election such as Ohio and Wisconsin. GM shut sport-utility vehicle plants in Moraine, about 70 miles west of Ohio’s capital of Columbus, and in Janesville, Wisconsin, where Romney’s running mate, Paul D. Ryan, grew up.

In accepting the nomination Aug. 29, Ryan attacked Obama, blaming him for the Janesville factory’s demise even though it ceased making GM’s SUVs while George W. Bush was in office.

Provincial Concerns

Provincial concerns plague any potential pan-European solution, said Stefano Aversa, a London-based co-president of the consulting firm AlixPartners LLP. He estimates that 40 percent of Europe’s auto plants are using less than 70 percent of their capacity, a minimum level to break even.

“This is something that needs to be addressed, ideally with a coordinated approach across Europe,” he said in a telephone interview. “But Europe at the moment has all sorts of other problems they are dealing with, and this probably will be a solution that will be taken country-by-country and company-by- company.”

Each country fending for its own workforce delays the progress needed for the whole industry to become profitable again, he said.

Giuliano Noci, associate dean at Milan Polytechnic’s business school, agrees.

“A U.S.-style turnaround isn’t replicable in Europe, as we don’t have the United States of Europe,” Noci said. “Europe can’t drive the restructuring. The consequence will be a Darwinian selection process among carmakers.”

To contact the reporters on this story: Craig Trudell in Southfield, Michigan, at ctrudell1@bloomberg.net; Tommaso Ebhardt in Milan at tebhardt@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net; Chad Thomas at cthomas16@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.