Driving up-market to survive

The European Commission will next week unveil its blueprint to ensure the survival of the EU’s car industry. Its proposals for a ‘competitive automotive regulatory framework’ come at a time when Europe’s car industry is still struggling to cope with the globalisation of markets.

The ideas contained in the document are derived from two years of consultation among stakeholders including industry representatives, trade unions, non-governmental organisations and member state officials. The high-level group, known as CARS 21, was set up to address such issues as discrepancies between national legislation and entry into foreign markets. Its recommendations will take into account the structural changes resulting from increased globalisation of the car markets in recent years.

A constant theme running through the discussions in CARS 21 and the Commission’s proposals has been the tension between economic competitiveness and regulatory requirements, whether made for environmental or safety reasons.

Ivan Hodac, secretary-general of ACEA, the European carmakers’ federation, says: "There is recognition that we need better regulation. There have to be impact assessments. We’re not making shoes; this industry has long cycles so we need proper lead time."

In some cases where member states’ rules diverge significantly, global solutions have been proposed. Regulatory standards relating to safety could, in future, be based on rules set out by the United Nations Economic Commission for Europe (UN/ECE), reducing the scope for governments round the world to use regulations to defend their markets against imports.

"We’re talking about things like tyre safety standards," says Wolfgang Sofka, a research fellow at Germany’s ZEW institute, who worked on an industry report for the Commission in the run-up to the launch of the CARS 21 initiative.

"Europe is probably top of that race," he says. "Every time we can get a global standard on a higher level it gives member states the opportunity to sell cars abroad. We won’t see a race to the bottom as [European] consumers are very demanding."

European consumer groups, however, have expressed fears about this ‘race to the bottom’, a scenario in which more stringent European standards could be replaced by heavily diluted international compromises. Jim Murray, director of BEUC, the European consumers’ group, worries that stakeholders outside the car industry will find it difficult to influence international UN/ECE negotiations. "Making the same rules for the US, China and the EU could lead to less regulation," he says.

Innovation also has a place in the Commission’s paper. Particular attention is paid to research and development in value-added sectors such as the emerging market for hybrid cars able to switch power sources (for example, petrol and electricity). It is in markets such as these, says Sofka, that the EU car industry can find a niche. Producing hi-tech cars that will always have a place at the top-end of the market could be a wiser move than attempting to compete with low-cost producers, he believes.

The issue of securing access to growth markets is also featured in the paper. China’s decision in 2005 to impose higher tariffs on foreign car parts destined for vehicles made with less than 40% of locally produced parts provoked legal action at the World Trade Organization (WTO) from the US, Canada and the EU last year.

Industry stakeholders are keen to ensure that the Commission seals more bilateral deals with emerging markets. They clearly prefer bilateral agreements to multilateral talks. "If it happened that in multilateral discussions we opened the EU market without having a reciprocal opening, we’d be very unhappy. Some countries may be using the mechanisms given to them by WTO negotiations to basically close their markets," says one industry insider.

The need to see deals agreed has become all the more acute given that Japan has managed to get tariffs lifted in Indonesia, Thailand and Malaysia, three key growth markets for EU manufacturers. According to Sofka, suppliers stand to lose out the most from blocked access to markets. "[Big companies] are well prepared," he says. "The problem is maybe for the [parts] suppliers, which are a large part of the value chain: 75% of all cars are produced by suppliers. These would be the ones needing a trade policy in terms of tariffs."

The evidence is that the big brands are already working out a strategy for global markets. Just two months before announcing job cuts at its factory in Brussels, Volkswagen announced a plan to double sales at its joint venture operation with Chinese manufacturer First Automotive Works Corp. As big companies with branding clout and design expertise spread themselves out across global markets, it is the small suppliers that could be left in the lurch.

The European Commission will next week unveil its blueprint to ensure the survival of the EU’s car industry. Its proposals for a ‘competitive automotive regulatory framework’ come at a time when Europe’s car industry is still struggling to cope with the globalisation of markets.