European plant capacity usage improves, but breakeven still years away

Capacity utilization at Europe's vehicle plants should rise to 70 percent this year because of factory closures and rising sales, and may return to 80 percent as soon as 2016, say forecasters. A return to the 2007 high of 85 percent, however, is not expected until 2020 – if ever – forecasters say. "Our prediction is that capacity utilization will increase, but it won't come back to peak levels of 2007," said Michel Costes, CEO of France-based automotive research group Inovev.

This year's expected improvement to 70 percent capacity usage from 68 percent in 2013 is encouraging, but it's still a long way from 80 percent to 85 percent that experts say is necessary for carmakers to run their plants profitably.

PwC's Autofacts unit said in a recent report that capacity utilization could exceed 80 percent in some European regions by 2016 – bolstering claims by money-losing mass-market producers that say they will bring their operations back into the black. Ford says its Europe unit will be profitable again next year while General Motors' Opel division and PSA/Peugeot-Citroen promise to stop losing money by 2016. Capacity utilization by all three was 60 percent or less in 2013.

“Given the increase in car sales from the 2013 trough, as well as plant closures and re-localization, capacity utilization could continue to improve going forward,” PwC Senior Manager Michael Gartside said.

This year’s planned closure of GM’s plant in Bochum, Germany, and Ford’s factory in Genk, Belgium, along with the recovery of car sales in Europe should improve the region’s capacity utilization by a couple of percentage points, Inovev forecast in a recent report. PwC says that the combined five European plant closures in 2013 and 2014 will reduce capacity by 650,000 units and that relocalization from other regions will add 550,000 cars.

A slight recovery in car sales will help ease the burden of too much manufacturing capacity, but not enough to make a big difference to carmakers’ bottom lines this year. “We still have a market with 20 million units of capacity and about 14 million sales,” Ford of Europe CEO Steve Odell told Automotive News Europe.

10 plants too many

A six-year slide in car sales amid Europe’s recession and changing consumer habits means that western Europe has up to 10 car factories too many, according to auto executives and sector analysts, translating into billions in combined losses at mass-market carmakers such as Opel, Ford of Europe, Fiat and PSA. Europe’s approach to solving the overcapacity problem has been to manage the decline step by step rather than the sort of coordinated solution adopted by the U.S. government’s automotive task force in 2009, which oversaw the lending of billions of taxpayer dollars to invest in turnaround plans following the bankruptcy of Chrysler and General Motors. Eleven U.S. factories were closed between 2008 and 2012, according to the Automotive News Europe Data Center. (One of those factories, GM’s plant in Spring Hill, Tennessee, was reopened in 2011.)

Closing plants in Europe is expensive because of high social costs, and is politically unpopular in a weak economy. Ford expects to be hit by $800 million in restructuring and personnel costs as it closes its Genk facility and moves that production to Valencia, Spain.

Inovev’s Costes said he expects four to five more plant closures in Europe in the next five years. “In a perfect world, it would be good to close 10 plants. But realistically, we think only four to five plants will shut in the next five years,” he said. Since it’s not politically feasible to shut 10 car plants in Europe, mass-market carmakers will be forced to continue their starvation diet of cost cuts for years to come. A recovering car market will help ease the pain. But the way to reduce losses, barring massive plant closures, is to “have good platform policies, since they decrease the cost and put more value-added cars on the market,” Costes said.

The success or failure of new models will drive the closures of under-used plants in the future, PwC’s Gartside said. “Future plant closures are a possibility,” he said, “if demand doesn’t increase as forecast or certain OEM growth strategies do not match their expectations.”

Douglas A. Bolduc contributed to this report