By William Boston in Berlin and Eric Sylvers in Milan
The proposed merger of Fiat Chrysler Automobiles NV and Renault
SA could unlock big savings for two of Europe's biggest but least
profitable auto makers by reducing excess capacity in a market
characterized by underused factories, meager returns and a bloated
workforce.
A deal would also provide the two companies with a bulwark
against a rising China and mounting incursions from technology
giants into auto makers' core business. It would help Fiat Chrysler
and Renault spread the costs of developing electric vehicles and
self-driving car technology.
Fiat Chrysler and Renault had the worst-performing factories in
Europe last year, operating at 52% and 70% capacity respectively,
according to research by LMC Automotive. LMC predicts capacity
usage will fall further for both companies' factories this year
before ticking back up slightly in 2020. On average, the main
auto-manufacturing plants of the European Union's biggest producers
operated at 73% capacity last year, not far from the profitability
threshold. That compares with 81% in the U.S. and 52% in China.
"If capacity usage falls below 75% it begins to be a problem,"
said Justin Cox, an analyst at LMC Automotive.
Volkswagen AG, with its stable of diverse brands that include
VW, Audi and Porsche, operated at roughly 79% capacity, while BMW
AG topped the rankings at 90%. In general, though, European car
makers have found it difficult to match factory capacity with
demand to smooth out the ups and downs of the cyclical car market,
partly because of political and labor-related risks of closing
factories. Strong European trade unions can mobilize tens of
thousands of workers to protest job cuts and shutdowns intended to
align production with demand and shore up profits.
Whether a factory is operating at capacity matters because the
more vehicles a plant can churn out on a single production line,
the lower the cost of production, which in turn boosts efficiency
and margins. With demand expected to soften after six years of
robust expansion, companies with the most overcapacity are the
first to feel the pain.
Fiat Chrysler, even with the benefit of its higher-priced Jeep,
Ram and Dodge brands in the U.S., is the least profitable of
Europe's biggest auto makers, generating on average about EUR848
($944) in profit per vehicle last year, according to the CAR-Center
for Automotive Research at the University of Duisburg-Essen.
"Europe is an expensive appendage and China generates losses
with very few sales" for Fiat Chrysler, said Ferdinand Dudenhöffer,
the founding director of CAR.
Renault earned about EUR930 per vehicle, and Volkswagen
generated EUR1,277. Peugeot, which bought Opel and Vauxhall from
General Motors Co. in 2017, was the top earner among Europe's big
volume producers, earning EUR1,467 per vehicle. Peugeot has been
better than its peers at cutting staff and capacity, working with
French unions to avoid conflict.
It is expensive to operate factories below capacity, on top of
labor costs partly related to high wages. European auto makers
recently have also had to, or plan to, boost spending to develop
electric vehicles to reduce average greenhouse-gas emissions to 95
grams per kilometer by 2021, as mandated by European law.
In a meeting with analysts at Evercore ISI in March, BMW Chief
Financial Officer Nicolas Peter said the luxury-car maker would
have to boost the share of electric vehicles in its fleet to as
much as 15% from about 6% now at a cost of as much as EUR7,000 per
vehicle to meet Europe's tough emissions targets.
At the same time, European auto sales are weakening, and
production is falling, widening the gap between plant capacities
and output. New-car registrations in the EU, a proxy for new-car
sales, totaled 15.2 million vehicles last year, up 0.1%, according
to ACEA, the European Automobile Manufacturers' Association.
Passenger-car production fell 2.1% to 16.1 million vehicles during
the same period.
Auto makers have bargained with trade unions to shrink their
payrolls in Europe by not replacing thousands of baby boomers who
are now reaching retirement age. In 2016, Volkswagen said it would
cut 30,000 jobs at its core VW brand through attrition alone. Ford
said in March it would cut 5,000 jobs in Germany and close at least
one plant in Saarlouis, near the French border.
Renault and Fiat Chrysler executives didn't rule out job cuts in
their initial comments. On the day Fiat Chrysler proposed to
Renault, John Elkann, the scion of the Agnelli family that controls
the Italian-American company, told a gathering in Milan: "There
will be no negative impact and there will be no factory
closures."
Fiat Chrysler's plan is targeting roughly EUR5 billion, or $5.57
billion, in annual cost savings, mainly through sharing technology
and using the same components on various Fiat, Chrysler, Jeep and
Renault vehicles.
In most cases, however, plant closures are politically sensitive
and always a last resort, according to Ian Fletcher, an automotive
analyst with IHS Markit, a research group. "The situation at a
plant has to be really dire."
Write to William Boston at william.boston@wsj.com and Eric
Sylvers at eric.sylvers@wsj.com
(END) Dow Jones Newswires
May 31, 2019 07:14 ET (11:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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