Rough road ahead for EU car-makers

Date: 11/01/1996

IT would be hard to pinpoint another time when the European car industry has faced challenges on the scale now confronting it.

The sector is not the first to complain about the increased competition it has come up against since the opening of the single market in 1993, alleging 'unfair' trading by third countries and complaining about 'excessive' regulation.

It is true, however, that European car-makers are facing up to these challenges just at a time when consumers are becoming more and more choosy about the vehicles they buy. In addition, technological progress is revolutionising the engineering content, vehicle performance and the compatibility of vehicles with environmental protection.

To make matters worse, the market - which had been picking up since Europe's economies began to emerge from recession more than a year ago - has seemingly inexplicably started to decelerate.

Recent figures show registrations of new cars grew only 1.1&percent; in the first 11 months of last year, rising to 11.257 million vehicles, compared with the same period in 1994. The results would have been far worse had it not been for the revival of the German market, up 3.8&percent; on the year, with Germany's 2.82 million registrations accounting for 28&percent; of the new car market. The figures were also boosted by strong growth in the UK, where sales in October alone soared by 11.5&percent;.

But France remains a blot on the landscape - the only country with figures for the whole of 1995 already compiled has revealed that sales collapsed in December. Although this was largely due to the public-sector strike against the Juppé government's efforts to cut social security spending, a general slowdown in the economy also contributed to the decline.

Overall, French sales fell by 2.1&percent; in 1995. It is now three years since the industry managed to sell 2 million vehicles and, to add insult to injury, the weakest performance was by French brands. While sales by Citroën, Peugeot and Renault were down 5&percent; on the year, those by foreign car-makers rose by 2.4&percent;, although this masks a very weak showing by BMW-Rover and Volvo in particular. The outlook for 1996 is far from rosy, with Peugeot predicting maximum growth for the European industry of 2&percent;.

Against this back-drop, South Korean manufacturers are starting to appear as a major threat to European car-makers. While their market penetration remains low, at less than 2&percent; of total sales in the EU, their growth rate is staggering. Offering low-priced cars competing with the smaller hatchbacks and sedans, and innovative sales techniques, companies like Daewoo and Kia managed to achieve sales growth of 71&percent; last year.

This is putting European car manufacturers on the alert. Why should the Koreans be able to win such unrestricted access to the European market while testing and certification methods in Korea are virtually closing off that market to them? The European Commission has taken heed and presses the Koreans to open their market each time the two sides meet. Nevertheless, all concerned know this will not happen overnight.

Meanwhile, Daewoo is leading the way in another phenomenon of the new European car industry: the move into Central and Eastern Europe. In August, the Polish government and Daewoo signed a deal for the Korean auto-maker to invest 840 million ecu in the state-owned car firm FSO. This follows a 1.1-billion-ecu investment by Fiat in another Polish plant.

Daewoo's bid beat General Motors, whose Adam Opel AG division had been assembling its Astra model at FSO. Similarly Volkswagen, Europe's leading car-maker, is expanding its operations in Slovakia as part of its efforts to offset high wage costs in Germany. Volkswagen Bratislava has increased car production from 3,000 in 1993 to 20,000 this year, and the company has moved all production of its four-wheel drive Golf Synchro family hatchbacks from Wolfsburg to Bratislava. The plant offers low wage costs, a highly-skilled workforce and is within 60 kilometres of the Austrian border.

The attractions of moving production into Central and Eastern Europe are becoming more and more apparent to western European manufacturers. The Japanese and Koreans are doing the same as part of a strategy to shift high-cost production from their homelands. This year, Honda looks set to become the first Japanese car-maker to produce more vehicles outside Japan than within. While shifting much of their production into Asia, both are also switching output to eastern and western Europe, leading observers to question just how 'European' the EU industry now is.

In addition to the long-standing General Motors and Ford presence in Europe, Japanese car manufacturing in the UK is also starting to look almost European. In November, Nissan's car plant at Sunderland, in north-east England, became the first Japanese manufacturing venture in Europe to invest more than 1 billion ecu in new plant.

With this new plant, Nissan UK will answer the critics who say its presence in Europe is not whole-hearted. The Sunderland plant will become an almost fully-integrated production facility, with only engine blocks and gear boxes still needing to be imported from Japan.

Within Europe itself, production is becoming more integrated. Again in the UK, where a policy of protecting the national companies was abandoned a decade ago, Rover Group is now part of BMW and Jaguar a division of Ford. The area where the market remains fragmented is in distribution, a factor which is starting to have perverse effects on the single market.

Currency volatility last year and the collapse of the lira, peseta and pound against the stronger northern European currencies caused some producers to complain of unfair competition from southern Europe.

Even within product lines, the fragmentation of the single market has caused problems - a study by the European Commission revealed that dealerships on borders between strong and weak currency countries were making it difficult for non-nationals to buy cars.

In December, anti-trust investigators carried out raids on Volkswagen dealerships after allegations that the company had told its Italian dealers not sell cars to foreigners trying to take advantage of the weak lira.

If this is true, it would violate rules allowing manufacturers to run exclusive national distribution networks as long as they do not erect barriers to foreign trade.

While coming to terms with all these problems, the industry is facing more and more demands for higher environmental and safety standards, all of which could add significantly to production costs.

The forum in which the industry has the greatest say is in the joint Auto-Oil Programme, which assesses emissions in seven major European cities. The industry is convinced that current practices, supplemented by low-cost initiatives by manufacturers, would meet the Commission's aim of reducing the nitrogen oxide and particulate matter in southern European cities significantly. The main aim is to get people to buy new cars made with the kind of technologies that are friendlier to the environment.

But a French scheme, which included government allowances and tax breaks enabling purchasers with a car more than eight years old to buy a new vehicle with a subsidy, seems mostly to have brought forward purchases that were going to be made anyway.