Excess Capacity in the Auto Industry

Business Week has an interesting article on its website about European automobile industry manufacturing. The article points out that, "Not a single European automobile plant closed during the recession, while 18 assembly factories have been shuttered in the U.S. since 2008. European governments prevented the biggest automakers from firing workers and used subsidies to prop up sales." In fact, the article goes on to compare two Fiat plants, one of which makes 7 cars per worker per year, versus 53 cars per worker per year at another plant in Italy. How can such productivity gaps be sustained? The answer, of course, is that European governments make it virtually impossible for automakers to rationalize capacity in an efficient manner. For many years, the US automakers also maintained far too much capacity.

What's interesting, of course, is that excess capacity may also become a problem in China in the next few years, one of the fastest-growing automobile markets. The reason, there, is that many players have rushed to build capacity in that market, yet the industry is still much more fragmented in China than in most other parts of the world. The central government recognizes the need for industry consolidation, and it has called for it. However, provincial governments appear to be barriers to rationalization and consolidation, because they either have an ownership stake in a local, state-owned enterprise, or because they don't want to lose local jobs. Thus, we have capacity and rationalization issues in both the East and West, though one is a high-growth market and the other has been either stagnant or in decline for the past few years.