OM in the News: Cutting Auto Overcapacity in Europe Isn’t Easy

With auto makers’ collective losses of $6.5 billion in Europe last year, companies are fighting tough union regulations to cut capacity, reports Businessweek (March 11-17, 2013). But Europe’s long history of worker protections means carmakers can’t simply fire employees or close plants when business sours. Workers in France, for example, must be extensively consulted beforehand. The process can take years and often results in political pressure to delay any job curbs—as has been the case with Peugeot’s proposed reductions. German labor law grants union representatives half the seats on companies’ supervisory boards—giving them considerable power to slow job cuts. Even when an automaker stops production at a plant in Europe, shutting it can take years because of worker protection laws. Fiat, which closed its factory in Sicily in 2011, still has some 850 people on temporary layoff arrangements on its payroll.

Peugeot is struggling to push through plans to eliminate about 20% of its workers in France. Ford aims to shutter two factories. Peugeot is fighting unions in court in Paris to shut a factory and cut 11,200 jobs. Labor is also fighting GM’s plans to close a German plant. Even if automakers succeed with the 5 factory shutdowns they’ve announced, their efforts may fall short of what’s needed. With sales and capacity utilization continuing to drop, they need to close 10 factories to restore profitability. Currently, 20 European automakers are running at less than 50% of capacity.

That’s in stark contrast to what happened in the U.S. after the government rescued GM and Chrysler in 2008 with an $80 billion bailout. The American industry’s recovery was made possible by job cuts, plant closings, and a UAW union agreement to half wages for new workers and eliminate traditional pensions and retiree health care. Today the 3 American automakers run 28 assembly plants in the U.S., vs. 36 in 2007. Employment at all U.S. auto factories fell to 524,200 in 2009 from a peak of 1.16 million in 2000, but by 2013, it had recovered to 662,300.

Discussion questions:

1. Why are automakers losing money in Europe?

2. What options do operations managers have when facing overcapacity at their plants?