Factory flaws

GM plant closure flags Europe's wider car crash

General Motors (GM) shut its Bochum factory on Friday, marking Germany's first automotive plant closure since World War Two. That highlights how slow Europe's car industry has been to tackle overcapacity.

In truth, Germany is something of an outlier. Home-grown manufacturers Volkswagen, Daimler and BMW have weathered the broader industry crisis well. Their factories operate at or near peak capacity and their businesses have remained profitable.

But the wider picture is grim. GM and Ford have not been so lucky in Europe as a whole, nor have the likes of Fiat and Peugeot. Across the continent only a few operations have shut despite a 25 per cent slump in sales between 2007 and 2013.

It's not that these automakers have failed to act at all. Ford has closed three plants while Fiat and Peugeot have shut down one each. The problem is that as an industry they have not done enough. Shutting European plants is expensive and politically toxic, especially in areas with high unemployment.

More than half of the region's 160 car factories were operating at utilisation of 70 per cent or below in the first quarter of this year, according to IHS Automotive. Most don't break even until utilisation hits around 80 per cent. And bumper profits only start rolling in when a plant is running three busy eight-hour shifts a day. As a result, automakers are churning out some 20 per cent more cars than there may otherwise have been demand for, according to IHS.

Auto sales are, at least, on the increase this year after a six-year slump. LMC reckons Western Europe sales this year should hit 12.1 million units, a 4.8 per cent increase from 2013. But discounts are still high. In Germany, for instance, new car buyers often pay 20 per cent less than the list price.

The result is razor-thin profit. Peugeot, the most Europe-focused carmaker, is likely to make an operating margin of just 0.6 per cent in 2014, for example. For as long as Bochum is the exception rather than the rule, Europe's car recovery is likely to remain in the slow lane.