There are early signs that the car companies will come out of what has been a very dark period far stronger than predicted just as the market starts growing again.
The key players are going through something of a self help programme to get back on track after the government well of support ran dry. Whilst far from perfect, they are carrying out one of the largest restructurings ever to deal with overcapacity issues that have dogged European car manufacturing since the 1970s.
Meanwhile, industry body LMC Automotives data points to a period of greater predictability around demand.
This could all mean a return to balance sheet optimisation and normal liquidity levels, potentially resulting in EUR15 billion becoming available for European headquartered car makers alone.
Volume players have seen the proportion of the manufacturing capacity they actually use fall from 80 per cent before the crisis to close to 60 per cent. Some production plants in Western Europe are believed to be running at as low as 20-30 per cent capacity.
But looking at their plans to close plants and optimise production, we predict capacity use will rise to 75 per cent by 2015 which is when meaningful growth is expected to return. This means capacity use at the bottom of the sales cycle could be close to what it was when the market was performing at its peak.That is real progress for a sector going through one of the most difficult periods in its history. The combined losses of high-volume car manufacturers reached more than EUR12 billion last year.
Even the premium car makers, who previously benefitted from extraordinary profits in China, are no longer immune to the challenges of the European market.
Faced with this backdrop, and more than five years substantial uncertainty, optimising balance sheets for shareholder returns has been a luxury none have afforded.
CEOs have instead acknowledged the pressure from credit ratings agencies since the 2008 crisis and demanded shock-proof balance sheets with substantial liquidity.
The US addressed the overcapacity issue after the financial crisis by pumping some USD80 billion of government money into the industry.
After the American market peaked in the 1960s, VMs struggled to deal with structural overcapacity. The injection of public cash allowed a one off re-setting of capacity which had a profound impact on the big three car makers GM, Ford and Chrysler bringing them back from the brink.
Europe had to find another way. Although European governments spent EUR30 billion to provide what the European Commission described as breathing space for reorganisation or rather, avoiding reorganisation its help largely ended there.
Thats why more capacity reduction from full plant closures has been announced in the past 12 months in Europe than in the decade-and-a-half before that.
Estimates vary about how many plants need to close. Some have said as many as 20, and our own analysis suggested 10. Thats from a total of 51 volume VM assembly plants across the continent.
Last year, we moved on from thinking about how many plants should close and undertook a detailed study into which ones could be closed. We analysed models, engines, platforms and suppliers, and did not underestimate the social and political sensitivities behind closing car plants.
We developed a five plant closure scenario which we believed affordable and enough to make a meaningful difference.
The European VMs then started announcing their restructurings. We predicted fairly accurately what GM, Ford and PSA would do all have shut plants but Fiat and Renault decided to shut none. Both have moved production of new models, initially planned for elsewhere, to Europe to make better use of their capacity.
Plenty of risks remain of course. The European macro economy is probably top of the list, but there are also more specific car industry concerns. Price discipline is one of them discounting appears to be increasing but we see pockets of more promising progress.
We should also not forget that none of the scheduled plant closures have yet happened and a reversal would be very damaging. However, if anything, these plans are being accelerated.
Another concern is, while debt markets have been exceptionally helpful to VMs in providing ready access to capital, this support must continue to 2015 and beyond.
Linked to this is the view of the credit ratings agencies. It is intrinsic in their approach that they will lag in their re-rating of the sector as it improves. This might delay the potential reduction in liquidity as they await a greater degree of proof that the change is long term and sustainable.
Overall though, things are looking up for European car makers after four troubled decades. Stability and growth may be around the corner and past problems are being at least partly resolved.
The memory of todays conditions might be too fresh in the memory for them to start realising new ambitions from 2015. But then again, this has never been an industry that lacks ambition.
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