European car firms. The big sqeeze

Is only just beginning for Europe's carmakers

JUST as General Motors has long been an icon of American business, so Volkswagen is a symbol of the German industrial economy. Unfortunately, the comparisons do not stop there. Late last year, GM announced big job cuts. On February 10th it was VW's turn. The company announced that over the next three years it will cut up to 20,000 jobs from its western German workforce of 103,000, as well as demanding longer hours from its workers for no extra pay--an announcement that was greeted with a 15% rise in the company's share price.

Where VW goes, much of Europe's car industry may follow. If they are to stay competitive, Renault, Fiat and PSA Peugeot-Citroen are all going to have to cut costs at home, and keep investing in lower-cost production abroad. Politicians and unions are anxious. VW has tried to soften the blow by saying that all its job losses will go through natural attrition.

The looming question is whether European carmakers can survive as providers of mass employment at home, given the huge discrepancy in labour costs between old Europe (particularly France and Germany) and the new (Romania, Slovakia and the Czech Republic)--not to mention China? The economy has a lot riding on the answer. Making vehicles and their components accounts for 1.8m jobs in Germany; and the car manufacturers' association claims that one in seven German jobs is directly or indirectly dependent on the car industry.

That explains why VW is having to tread carefully in Germany. This week it is presenting its workers' representatives in Wolfsburg with hard numbers--such as the statistic that labour at VW's six plants in west Germany costs four times as much as at its plant in Portugal (see chart). Its emphasis on Portugal--while refusing to publicise figures for its plants in central Europe and China--may reflect the extreme political sensitivity in Germany of any suggestion that living standards are being undermined by competition from the EU's new member states. But had VW chosen to release the figures, the comparison would have been even starker. Car workers in the Czech Republic, for example, earn around euro5.2 ($6.2) an hour. In China labour costs at car plants are around euro1.1 an hour--around 50 times lower than in western Germany. Last year China became a net exporter of vehicles for the first time.

Small wonder that VW, as a global firm, is putting its weight behind investments in China (where it has two joint ventures, one 40%-owned the other 50%) and Russia, where it is building a new plant near Moscow. Political pressure swayed a recent decision to build VW's compact sport utility vehicle at Wolfsburg, rather than in Portugal--but that could be the last hurrah for the home team.

VW's problems are particularly acute. Its European factories have 20% surplus capacity, compared with 16% for Renault-Nissan and just 3% for BMW. But cuts are also happening elsewhere. DaimlerChrysler recently announced a 20% reduction of central-management staff, on top of plans to shed 8,500 jobs at Mercedes in Germany by September. But even DaimlerChrysler promised that, until 2012, it would cut only by natural attrition.

The French and Italian counterparts to VW and GM are also in trouble. Carlos Ghosn, boss of Renault, France's second-biggest carmaker, presented a four-year plan on February 9th. Much is expected of Mr Ghosn, who has become one of the biggest stars in the car industry since his rescue of Nissan, a Japanese carmaker partly owned by Renault. At Nissan, Mr Ghosn turned huge losses into huge profits and wiped out debts of some $23 billion in a few years.

Optimists hoped it would take him just a few months to fix Renault's smaller problems. But they may not have reckoned with the peculiarities of French politics, which make VW's behaviour seem almost unimaginably radical. Announcing job losses at a company in profit could well have sparked mass demonstrations and social unrest in France.

"I am not cutting jobs, because I don't have to," Mr Ghosn declared. Others say that he is not laying off people because his hands are tied. The French state is his company's largest shareholder, with a 15% stake. And the CGT, the powerful Communist-dominated union, is in the background. It flexed its muscles with a small rally of about 1,000 Renault workers on the day the new strategy was announced. So with lay-offs ruled out for the moment, Mr Ghosn is going on the offensive--he aims to launch 26 new models over the next four years, and to make a push into the more profitable market for luxury cars. But he may ultimately have to try to cut jobs too. Renault's Sandouville plant, running at only 40% of capacity, is vulnerable.

Tough measures are as unpopular in Italy as they are in France and workers at Fiat, Italy's biggest carmaker, also have a history of dramatic industrial action. Sergio Marchionne, Mr Ghosn's counterpart at Fiat, has been able to cut the workforce by about 15% since he arrived in May 2004 only because the company's very survival was in question. Even then he could do little more than freeze the jobs of workers due to retire and use a government-sponsored scheme to lay off workers temporarily. But he is likely to come back for more after the elections on April 9th.

Some voices of gloom predict that in ten to 15 years car production in western Europe will be virtually extinct. The BMW plant in Leipzig, which opened last year, is likely to be the last big car-assembly plant to open in western Europe, says Ferdinand Dudenhoffer, head of the Centre for Automotive Research in Gelsenkirchen. It was generously subsidised by the German federal government. By contrast, western European firms need relatively little inducement to invest in central Europe. Peugeot is producing some 300,000 cars a year in the Czech Republic in a joint venture with Toyota. It has also opened a car plant in Slovakia, as have VW, Ford and Hyundai. Renault is doing well at its Dacia subsidiary in Romania. Fiat is producing the Panda in Poland.

Though the struggles of American companies such as GM--with high labour costs, powerful trades unions and shrinking market share--might sound familiar to some European car bosses, the United States also offers more hopeful pointers. In America's southern states, car plants paying $25 in hourly wages are doing well, because they are close to the market, flexible, quick to fulfil orders and produce high-quality cars. The need for vehicles containing new energy-efficient technologies and lighter materials may also allow west European producers to carve out a future at the hi-tech end of the market. VW's beleaguered managers and workers will certainly be hoping so.