A Neat U Turn In EuropeJohn Templeman
Last year, Europe's auto makers fell into the abyss. Sales crumpled a catastrophic 16%, to 11.3 million units--the sharpest recession since World War II--and four of the Big Six manufacturers lost money. Italy's Fiat posted the biggest loss in its 95 years and paid no dividend for the first time in more than 40 years, while even profit leader General Motors Europe saw its net cut in half, to around $600 million. For a terrible moment, it looked as if all the dire predictions about the European industry's loss of competitiveness had come disastrously true.
This year, much to their own surprise, major companies are recovering. Car sales in Western Europe's huge market rose an estimated 5%, to 7.3 million units in the first seven months, confounding industry forecasts of a flat year. Volkswagen, Europe's biggest producer with its stable of VW, Audi, Skoda, and SEAT brands, returned to profits in the second quarter. And demand for Fiat models, such as its new Punto compacts, is so hot that plants usually shuttered in August for vacations were working full tilt.
Is the uptick in profits a fluke--or the payoff to European auto makers for their massive makeover efforts in recent years? Industry leaders aren't popping champagne corks just yet. Unveiling VW's new subcompact Polo in Paris on Aug. 22, CEO Ferdinand Pich said incoming orders in July fell back to the same level as a year ago after an 8.5% rise in this year's first six months. That alarmed European stock markets, where carmakers have been strong performers this year: VW shares are up 9% so far despite a 4.3% drop on Aug. 23, and Peugeot's 6% year-to-date rise contrasts with the Paris market's overall 11%
HARD CLIMB. There's no doubt, though, that the industry is leaner and meaner: By giving themselves a painful tune-up, Europe's companies have made substantial gains (table). Peugeot Chairman Jacques Calvet brags that his company's productivity grew 50% in the past five years. Industry payrolls have shrunk drastically: GM Europe, for example, has shed 6,600 workers, or over 7% of its labor force, since the end of 1992. And from Mercedes' C-Class to Fiat's Punto, both launched last year, new models are attractive and more aggressively priced than before.
Such basic strides, combined with Europe's economic recovery and temporary sales incentives in some countries, have started auto makers on what looks like a still-arduous climb back to competitiveness. So far this year, they have enjoyed unexpected luck. The strong yen has lamed most Japanese rivals, although Honda's European sales are up. And car buyers are regaining confidence from reviving economies--with Germany's, for example, now expected officially to grow 2.5% this year.
The biggest boost, though, has come from temporary measures in France, Spain, and Denmark to spur car sales. Buyers who scrap old clunkers get hefty rebates. The French government, for example, gives $950 to owners who junk 10-year-old cars and buy new ones. "The scrapping incentives," says Arthur Maher, auto analyst at consultants DRI Europe Ltd. in London, "turned those markets around." The tonic has been most powerful for French and Spanish producers. Peugeot and Citron sales, for instance, rose 10% and 15% in the first seven months of this year, respectively, while VW's Spanish unit SEAT scored a nearly 20% gain. The incentives will be phased out by the end of 1995, but they have benefited carmakers by advancing the cyclical pickup in European markets.
Spreading the rebound over two years is providing a welcome breather. But more wrenching change is still to come. "Most of the Europeans underestimate the effort involved" in regaining world-class competitiveness, says Susan G. Jacobs, chairman of Little Falls (N.J.) auto consultancy Jacobs Automotive. "It took [Detroit's] Big Three a decade and several tries to get it right."
CHERRY-COLORED. At least the effort is under way. Peugeot's Calvet, for example, is calling for another 50% gain in productivity in the coming five years. And Renault expects to go on cutting its workforce by a steady 4% to 5% a year despite already lopping off 29,000 jobs in five years. "It's unavoidable, [if we want] to stay competitive," says Chairman Louis Schweitzer.
Fiat's new $2.9 billion plant, opened in January at Melfi in southern Italy, is another attempt at getting it right. It borrows heavily from Japanese ideas--right down to just-in-time suppliers located nearby and cherry-colored uniforms worn by everyone from assembly line operatives to plant bosses. The acid test will be whether it can hit its ambitious production goals. Its 5,700 production workers are supposed to build 450,000 cars annually--a rate of 79 cars per worker per year, compared with Japan's average of 78.
By overcoming their initial distaste and learning from Japan, European makers have narrowed the productivity gap. Karl E. Ludvigsen, chairman of London-based auto consultants Ludvigsen Associates Ltd., figures Europe's best are about 30% less efficient than the median Japanese producer, compared with 50% five years ago. In 1999, the European Union will dismantle its final barriers against Japanese-made cars. The challenge for Europe's auto makers, in the race of their lives, is to pull level before then.
AS EUROPE'S AUTO MAKERS BOOST THEIR HORSEPOWER... ...THEIR SALES ARE REBOUNDING
LEANER PAYROLLS Industry employment cut 20%, to less than 1 million workers since 1989.
HOT NEW MODELS Fiat's small Punto and Ford's Mondeo are selling fast. VW just unveiled a new subcompact Polo, and GM Europe is launching a Tigra sports coupe.
IMPROVED PRODUCTIVITY Each worker at Fiat's $2.9 billion Melfi facility is expected to produce 79 cars a year, about the same as Japanese makers.
LOWER PARTS COSTS Major companies are getting price cuts of 15% or more from components suppliers, outsourcing parts engineering, and using more common parts.
FASTER DEVELOPMENT Peugeot-Citruen can now get a new car from drawing board to market in 3-3/4 years, down from 5 years at the end of the 1980s.