Problems with over capacity in the car market

The car industry is such a good place to go for examples of Business Studies in action. Here, the problem under discussion is capacity utilisation. This concept is very closely linked to the idea of a breakeven point.

If car producers have vast factories, production lines and huge workforces they are often stuck with high fixed costs. To breakeven (and eventually make a profit), the manufacturers have to sell lots of vehicles to cover their costs. For many car firms, this simply isn’t happening and losses are mounting.

This Economist article explains the woes of Europe’s carmakers. The euro-area crisis has aggravated an ongoing oversupply of cars in Europe and prompted a brutal price war. Peugeot is burning cash at a rate of €200m a month. Its shares have slumped. Investors wonder whether it can survive more than another year or two. The answer would seem to be trying to cut back on costs. Peugeot said earlier this month that it would cut 6,500 jobs and close its factory near Paris, but President François Hollande insisted that its plan “will not be accepted”.

Ford said its losses this year in Europe would be far worse than expected, at more than $1 billion. Opel-Vauxhall (whose boss was replaced this month, for the second time in eight months) is expected to lose more than $1 billion this year, on top of the $14 billion lost since 1999. Not every company is suffering. Daimler said its first-half profits were up slightly, to €2.9 billion. Jaguar Land Rover, British-based but Indian-owned and enjoying record profits, said it would create a further 1,100 jobs at a factory near Birmingham, on top of a similar expansion at a plant near Liverpool. On July 26th Volkswagen announced record profits of €6.5 billion for the first half, up 7% on a year earlier.

Western Europe’s car market is, overall, in its fifth year of falling sales. But in some markets, such as Britain and Germany, sales are slightly up so far this year and premium brands such as BMW and Land Rover are enjoying strong export demand from emerging markets. But the central problem seems to be over-capacity. There has been massive restructuring in most industries since the financial crisis five years ago – but only two European car factories have closed. One analyst quoted in the article argues that only drastic cuts in capacity, with up to 12 assembly plants closing, will be enough to restore the fortunes of Europe’s car market.

The article is well worth a look, and you might like to also ckeck out Honda’s response to the problem and a video clip about the approach favoured by General Motors from earlier this year.