OM in the News: Europe’s Turn to Face Auto Plant Overcapacity

While Europe has been preoccupied with the euro crisis, another storm has been gathering that could also take a huge toll on jobs. Just as it has too much debt, Europe has more auto factories than the economy can support. With new car sales down 21% in France and 17% in Italy, “the overcapacity is not exactly a secret,” writes The New York Times (March 7, 2012). 

“All of the car manufacturers have capacity problems–all of them,” says Carlos Ghosn, head of Nissan-Renault. Government scrap programs, which promoted the replacement of older cars with new ones through the 2009-2010 downturn, are not likely to be repeated. Nations are simply not in a financial position to subsidize unproductive plants as they may have in the past. But in Europe, any attempt to cut costs will deteriorate into a political struggle among the countries that stand to lose jobs.

Sergio Marchionne, the CEO of Chrysler-Fiat, estimates the industry needs to cut capacity by 20% in Europe, a huge number when considering the 2.3 million employees making cars and parts. Unused capacity, as we saw in the US, is ruinous for automakers because idle factories cost money to maintain and unproductive workers to pay. Production capacity in Europe fell only a little after the 2009 downturn. Fiat closed a plant in Italy, Saab went bankrupt in Sweden, and Opel shut a plant in Belgium. Some companies have become better at managing fluctuations in demand. BMW, for example, makes use of temporary labor. Porsche outsources production of some models. Still, a large production overhang remains.

Discussion questions:

1. How is the US auto industry different from that in the EU?

2. In what ways can European car makers cut capacity?