PROSPECTS FOR WESTERN EUROPE'S AUTOMOBILE INDUSTRY

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• Collection: General CIA Records
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• Original Classification: C
• Document Page Count: 20
• Document Creation Date: December 22, 2016
• Document Release Date: February 2, 2012
• Sequence Number: 1
• Publication Date: November 1, 1986
• Content Type: REPORT

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Automobile Industry
eonfidential
Prospects for Western Europe's
eVnfiYGntlilr
EUR 86-10044
November 1986
copy 3 6 2
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Intelligence
Prospects for Western Europe's
Confidential
EUR 86-10044
November 1986
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Automobile Industry
This paper was prepared b the
Office of European Analysis. Comments and queries
are welcome and may be directed to the Chief,
Issues and Applications Division
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Confidential
Prospects for Western Europe's
Automobile Industry
Scope Note This paper is the latest in a series examining traditional industries in
Western Europe. Two previous papers focused on the shipbuilding and
textile industries, and a future assessment will deal with the steel industry.
In each paper we focus on the industry's restructuring efforts, foreign
competition, and how the role of government has influenced the economic
health of the industry.
Our analysis of the automobile industry concentrates on the six major
volume-producers in Western Europe-Fiat, Volkswagen, Renault, and
Peugeot, along with Ford and GM of Europe. Together these six firms
control roughly two-thirds of the total West European market, but close to
90 percent at the low end of the market. Several other firms compete in the
volume end of their domestic markets but are not volume suppliers in
foreign markets. Daimler-Benz, for example, while having a relatively
substantial share of its domestic market has a very minute share of foreign
markets because of its specialization in high-priced luxury models. As a
result, we are excluding these firms from our definition of major volume
producers.
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Automobile Industry
Prospects for Western Europe's
Key Judgments After six consecutive years of aggregate losses, the medium-term prospects
Information available
as of 5 October 1986
was used in this report.
formance in 1986 to match 1985's.
for Western Europe's automobile industry-the largest industrial sector in
Western Europe-remain tenuous, even though the outlook for 1987 is
relatively brighter. Total losses for the six major automobile producers-
Fiat, Volkswagen, Renault, Peugeot, and Ford and GM of Europe-have
been decreasing and four of them turned a profit in 1985. The industry's
moderately improved performance results from a combination of restruc-
turing efforts and the general improvement in economic conditions in
Western Europe. With consumer confidence boosted by lower interest
rates, low oil prices, and planned tax cuts in some countries, we expect per-
discounting strategy to cut losses.
Several major structural problems remain, however, with overmanning and
excess capacity continuing to be the primary ones. These problems,
combined with an intensely competitive market, will work to keep profit
margins depressed for the next several years. West European firms are
trying to come to grips with the problems, albeit with varying degrees of
success. In addition to trying to shed more workers, the industry is looking
at joint ventures to improve productivity and competitiveness. Fiat and
Volkswagen have been the industry leaders in modernizing operations, but
even they still face a serious competitiveness problem outside their home
markets. Renault, which has been the slowest among the six to restructure
operations, has correspondingly more serious competitive problems. On the
other hand, we believe Ford and GM of Europe may be in a position to in-
crease their market shares because both firms' operations now include
three home markets-West Germany, Britain, and Spain. The latter is
especially important because of its low labor costs and newly gained duty-
free access to EC markets as a Community member. Achieving their goals,
however, is proving difficult. Ford has yet to merge with another West
European firm in its attempt to lower development costs, while GM must
improve its production efficiency and may have to abandon its price
West European automakers are also increasingly relying on automation to
cut production cost and achieve greater flexibility. New production
technologies alone, however, will not enable the West Europeans to equal
Japanese efficiency. The leading West European automakers employ
technology similar to that of the Japanese. Much of Japan's success is
attributable to lower labor costs along with its more efficient workforce
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counterparts.
and management techniques. West European automakers will have to
concentrate in these areas if they are to close the gap with their Japanese
believe governments will increasingly rely on trade restrictions and local
content legislation to shelter the industry against third-country imports.
We believe that the restructuring process will remain on a slow track over
the next two years because of union resistance and the reluctance of
associated socialist parties to back programs that could cost jobs and hurt
them in elections. In addition, most West European governments are
growing more reluctant to subsidize the industry directly. But, too many
jobs are at stake for them to stop protecting the industry altogether, and we
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Even if the West Europeans should make marginal improvements in their
efficiency, as we expect, we believe the Japanese will be moving ahead
faster, pushed in part by the new competitive threat also facing West
European producers-South Korea. The South Koreans are also attempt-
ing to become a major automobile exporter, and, given their success in the
steel and shipbuilding industries, we expect the Japanese to respond and
make every effort to maintain their current market advantage. Conse-
quently, the West Europeans are unlikely to match Japanese efficiency
even in the medium term. Restructuring efforts have not enabled the West
Europeans to recapture lost shares of third markets, and prospects-
particularly in the low-priced, high-volume end of the business-are dim.
Growing South Korean competition will further squeeze the West Europe-
ans out of third markets as well as create new challenges for the volume
producers in their domestic markets. Western Europe's competitive advan-
tage, both at home and abroad, is likely to continue at the top-end, luxury
class of automobiles, a market the Japanese are only beginning to target.
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Key Judgments
Government "Help" 5
Japanese Competition 6
Capacity and Investment 7
The Road Back to Profitability 8
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Prospects for Western Europe's
Automobile Industry
The automobile industry is both Western Europe's
single-largest industrial sector and employer, and is
one of several traditional industries undergoing major
restructuring. Unlike the cases of the steel and ship-
building industries, however, governments are trying
to minimize their future involvement with the auto-
mobile industry. Despite recent improvement, the
industry still accounts for about half the world's
excess production capacity and must make further
cuts in plant size and number of workers if it is to
improve competitiveness in the long run. We will
examine the progress the volume producers have
made in restructuring their operations and assess their
prospects for overcoming the obstacles and constraints
still facing them.
The West European auto market is fragmented and
highly competitive (see figure 1). Only 2.2 percentage
points separated first place from last among the
volume producers in 1985, down from a gap of six
percentage points in 1980. Because the market is so
intensely competitive, efforts to increase efficiency by
expanding volume. have generally set off scrambles for
larger market shares. The result has usually been
widespread price cutting-with discounts ranging be-
tween $200 and $2,000 on models-which hurts
earnings. Cutting profit margins in Western Europe
has been particularly damaging because the market is
dominated by small economy models for which profit
margins are already tight.
After five consecutive years of losses totaling
$3 billion, aggregate losses for the West European
automobile industry are now on the decline. Although
the industry in 1985 still lost roughly $300 million,
sales reached 10.6 million units, the highest in the
1980's (see figure 2). Prospects for automakers appear
good for 1986 and 1987 if, as we expect, West
European economies continue their upturn:
? Consumer demand should remain firm as real per-
sonal income continues to rise. Decelerating infla-
tion, aided by the decline in the dollar, should work
to drive down interest rates, helping sales of con-
sumer durables and autos in particular.
? Generally weak raw-material prices should continue
to help producers hold down costs, while low oil
prices benefit both producers and consumers.
? Income tax cuts in some countries-such as West
Germany and Belgium-will help boost consumer
confidence and spending. 25X1
? European automakers should benefit from the ap-
preciation of the Japanese yen, which has raised the
price of Japanese cars in Western Europe, although
not as much as in the United States.
Although business-cycle conditions have benefited
most automakers, some volume producers have re-
turned to profitability largely because of restructuring
efforts to reduce cost and improve efficiency. Those
firms that have gone furthest in automating, trim-
ming labor forces, and reducing break-even points are
now profitable at much lower output levels than at the
start of the 1980's. Among the volume producers, Fiat
and Volkswagen have been the most aggressive in
restructuring their operations and in regaining profit-
ability.
The major part of Fiat's success is the result of sharp
reductions in production costs. Fiat's total work force
is down about 30 percent since 1979. The smaller
work force helped increase productivity by 70 percent
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Figure 1
West European Automakers: Share of Domestic
Automobile Markets, 1980 and 1985
imports 2.9
VW-Audi EC imports
30.8 18.4
Japanese
Peugeot/
GM (Opel) Citroen 36.4
Alfa Romeo
6.9
VW-Audi
28.6
Other imports 6.3 -
Other domestic 1.7
Alfa Romeo
r S
EC imports
38.5
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Figure 2
Western Europe: Selected Economic Statistics, 1980-85
Unemployment ...
Percent
-3 1980 85
And, Together With Rising Automobile
Industry Real Wages ...
Index: Big Four 1980 wages=100
Sales in an ...
Million units
I 1 1
0 1980 85
And Relatively Poor Motor Vehicle
Industry Productivity ...
Index: Japanese 1980 productivity=100
100
Japan
Have Helped Produce a Chain of
Automobile Industry Losses
Billion US $
0
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during the period 1979-83, and by 1985 the automo-
bile division earned $280 million in profits. Absentee-
ism-endemic in Italy-dropped from 20 percent in
1980 to just 4 percent by 1983. In addition, Fiat
enjoys a highly protected home market that has
helped its profit margin. According to industry ana-
lysts, higher domestic profits and volume production
have allowed Fiat to reduce profit margins on exports,
making it more competitive in other West European
countries where Fiat officials have decided to concen-
trate their efforts. Fiat stopped selling in the US
market in 1983, a bold, strategic move 1
and simplified their marketing strategy.
Surging exports, on the other hand, enabled Volks-
wagen to overtake Ford last year and become the
market leader in Western Europe. Volkswagen's prof-
it in 1985 was roughly $200 million, up from
$83 million the previous year. The company's success
stems primarily from exports of high-priced Audis to
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the US market, windfall gains resulting from the
strength of the dollar during 1983-85, and the rising
European sales of its Golf model-the best selling car
in Western Europe in 1985. In contrast, domestic
sales increased only 2 percent in 1985 as consumers
stayed out of the market, waiting for Bonn to decide
whether to require pollution controls on automobiles.
Peugeot also returned to profitability in 1985, earning
a $60 million profit after five years of losses. Most of
Peugeot's improved performance results from exten-
sive restructuring and the popularity of its 205 model.
Company officials point out that unlike state-owned
Renault, their firm's recovery was achieved with
comparatively little government support.
In spite of the recent economic upturn and state
subsidies, Renault continues to perform poorly. Ren-
ault's domestic sales dropped 7 percent in 1985 after
plummeting 23 percent in 1984. Its dismal sales
record contributed to record losses of $1.2 billion in
1985 and $1.4 billion in 1984. In addition to slumping
sales, Renault has suffered because it has implement-
ed structural reforms at a much slower pace than its
more successful West European competitors. The
company plans to trim its labor force from 98,000 to
77,000 by the end of 1986, primarily through volun-
tary incentives. Its record and certain union resistance
suggest that it will fall short of that goal.
The West European affiliates of General Motors and
Ford have a mixed record. GM, which owns Opel in
West Germany and Vauxhall in Britain, has been
pursuing a risky strategy of boosting its market share
through aggressive price discounting. It sold a record
1.2 million units in 1985 and increased its share of the
West European market to 11.4 percent-up from 8.2
percent in 1981. Its losses also increased, to
$372 million, up from $291 million the previous year.
Ford, on the other hand, has consistently turned a
profit throughout the decade. GM is in the process of
reorganizing its West European operations to achieve
better production coordination and increased efficien-
cy like archrival Ford. Ford, for its part, is seeking to
merge with another West European firm to reduce
development costs, but it is having trouble. Fiat,
which itself negotiated unsuccessfully with Ford
about a merger, wants Rome to reject Ford's offer of
an agreement that would give it control of Alfa
Romeo.
In spite of the current improvement in their fortunes,
the major West European auto firms face a wide
range of problems that will not be solved easily:
? Overemployment and strong unions are likely to
keep firms' unit labor costs relatively higher than in
the United States or Japan.
? Government help-subsidies, protectionism, and
other generally defensive-type aid-will continue to
slow West European firms' adjustment to new mar-
ket conditions.
? Japanese competition will continue to help keep
prices and profits down.
? Excess capacity will continue to keep costs high and
to hamper attempts to increase productivity, despite
the efforts of automakers to redirect their invest-
ment energies.
Many of these problems are reflected in the poor
productivity figures of West European automakers.
Productivity among the volume producers ranges
from 8.5 to 12.0 motor vehicles per man-year, or 40 to
60 percent below that of Japanese firms. Part, but not
all, of the Japanese advantage comes from the longer
hours their employees work compared with the West
Europeans. Japanese autoworkers put in about 2,200
hours per year, or about 25 percent more than their
West European counterparts.
Labor Demands
Powerful labor unions and rigid labor laws combine to
form a formidable obstacle to further reductions in
the labor force, a key to improved productivity.
Temporary layoffs are not allowed, and overtime is
viewed by most labor unions as a management ploy to
hold down employment. Nowhere is the need for
change more pressing than in France. In 1984 a
government commission concluded that the French
automobile industry needed to shed 70,000 of 230,000
jobs and undertake a major investment program to
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Table 1
Selected Countries: Real Hourly Earnings
in the Automobile Industry a
United States
15.88
15.41
15.54
15.21
15.34
15.62
Japan
6.93
7.15
7.54
7.74
7.83
8.15
West Germany
15.53
15.90
16.25
16.79
16.73
17.31
France
10.36
10.69
11.24
12.91
11.79
11.70
United Kingdom
8.24
8.05
8.44
8.65
8.84
9.46
Italy
8.08
8.52
8.78
8.75
8.98
9.46
Spain
7.11
7.94
7.95
7.88
7.71
7.87 b
a Deflated hourly earnings converted at 1980 exchange rates.
b Estimate.
remain competitive. The commission pointed out that
French automobile companies employed one-third
more workers per unit produced than did Fiat.
costs.
Yet when Citroen, a subsidiary of Peugeot, proposed
in 1984 to reduce its work force of 46,000 to 40,000,
angry employees staged a strike and occupied a
manufacturing plant. Only after months of negotia-
tions with the government and labor unions did
Citroen receive union permission to eliminate some
4,000 jobs through retirements and 2,000 through
layoffs. With the exception of West German produc-
ers, most European firms have faced similar reactions
when layoffs have been proposed. By preventing com-
panies from laying off excess workers, unions have
limited the use of labor-saving equipment that other-
wise would improve efficiency and lower production
Government "Help"
Government intervention has created problems by
enabling firms, which otherwise might have been
forced to revamp operations or leave the market, to
maintain operations despite heavy losses. Faced with
rising unemployment rates, governments often tried to
protect or create jobs at times when the industry
needed to eliminate them and increase automation.
The specific form of intervention has varied, but
usually has involved direct and indirect subsidies, and
import quotas:
? Rome continues to protect the Italian automobile
industry by severely restricting Japanese imports.
The Japanese can sell only about 2,500 vehicles per
year because of an agreement dating back to 1953.
Rome also supports the industry by taxing the
ownership of cars so that small cars, which have
been Fiat's traditional strength, are more attractive
to Italian consumers. Low interest loans were made
available to state-owned Alfa Romeo to cover losses,
restructuring, and R&D programs.
turing base for auto exports (see table 1)
Labor unions also make it difficult for West European
automakers to reduce wage costs. Although still lower
than in the United States, wage rates in Western
Europe are generally higher than in Japan. Spanish
wage costs are an exception, and consequently Spain
is viewed by some automakers as an ideal manufac-
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 Figure 3
Japan: Share of West European
Automobile Market, Selected Years
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? Paris wants to ensure the survival of at least one, if
not two, French firms in the world automobile
market, according to press reports. This year state-
owned Renault will receive between $2.8-3.5 billion
(at first-half 1986 exchange rates) in grants and low
interest loans. In addition to providing financial
assistance to state-owned Renault to cover losses
and finance modernization, Paris's reluctance to
agree to common EC automotive standards is, in
effect, a nontariff barrier against imports. Japan's
share of France's automobile market has been limit-
ed to 3 percent since 1977. The government's
restrictions on foreign investment also keep non-EC
firms from establishing operations in France.
? London's involvement with the automobile industry
consists primarily of voluntary restraint agreements
(VRAs) with Japan and furnishing subsidies and low
interest loans to state-owned British Leyland (BL).
Since the late 1970s, Tokyo has agreed to voluntari-
ly limit its share of the British automobile market to
10.6 percent, which not only benefits struggling BL
but other UK automakers as well, including Ford
and GM. To provide additional support for BL,
London has given the firm over $3 billion since
1975.
? Bonn is an exception to the general rule. Its involve-
ment in the industry has been minimal, apart from
its role in securing an informal agreement limiting
the share of Japanese imports to 10 percent of the
West German market during 1981-83. The above-
average performance of the West German economy,
and the automobile industry in particular, has limit-
ed the need for government intervention. Also in
West Germany's favor is the generally good rela-
tionship between labor and management. Union
involvement in the managerial decision making pro-
cess has generally created a more positive attitude
by workers toward technical change.
West European governments now are tending to back
away from direct support of the automobile industry
in favor of more indirect methods. In early 1986, for
example, Madrid sold a 51 percent interest in SEAT,
its state-owned automaker and perennial lossmaker,
to Volkswagen rather than continue providing massive
subsidies. London is also adopting a harder line
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19
against subsidies for state-owned BL. Although gov-
ernments may no longer be willing to provide the
automobile industry with generous subsidies, too
many jobs-roughly 5 million-are at stake for them
to completely abandon the industry. Governments are
relying more on trade restrictions and are looking at
local content legislation as means of aiding the indus-
try.
Japanese Competition
The Japanese have an overall market share of 11
percent of the West European automobile market, up
from only 1 percent in 1970 (see figure 3). The
Japanese share certainly would be higher if not for
import restrictions, particularly in France and Italy.
In Belgium, Denmark, Ireland, and the Nether-
lands-all countries with few or no import restric-
tions-the Japanese market share ranges from 23 to
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market share.
34 percent. Japanese producers, at least when the
dollar was stronger, have been willing to accept
smaller profits in Western Europe in exchange for
prevention rather than detection.
There is no single reason for Japan's competitive
superiority. A good part of its success can be attribut-
ed to the labor cost and quality advantage it holds
over its main competitors, but these are not the only
reasons. Neither is automation the reason-the Japa-
nese employ the same level of factory automation in
production operations as the leading West European
producers. Much of Japan's advantage stems from its
more efficient work force and management
techniques:
? Die changes in a Japanese plant can be made in five
minutes, contrasted with four to six hours in most
West European plants.
? Japanese plants typically have only four to eight
hours of inventory on hand, compared with about 20
days for some West European producers.
? The Japanese approach to quality control in manu-
facturing and design, which is based on defect
Japanese competition has affected West European
exports as well. From 1975 to 1981, Western Europe's
share of auto exports from members of the Organiza-
tion for Economic Cooperation and Development,
excluding intra-West European trade, dropped from
36 percent to 27 percent, while the Japanese share
rose from 29 percent to 57 percent. Nowhere has the
decline in Western Europe's share of foreign markets
been more evident than in the United States. Unlike
small West European automakers with special niches
in the US market, such as Mercedes, Saab, and
BMW, the volume producers have been beaten out in
the US market by the Japanese and no longer ship a
high percentage of their exports to the United States.
In 1975, Western Europe sold nearly 672,000 cars in
the US market compared with just over 867,000 by
Japan. By 1982, however, Japanese sales had more
than doubled to roughly 2 million units while West
European sales slipped 35 percent to about 436,000.
In 1985 the West Europeans edged their shipments
up, to 606,000 cars, with nearly 77 percent of the
increase over 1982 resulting from improved sales by rreS
Mercedes and other luxury auto manufacturers. Be-
cause of the Japanese competition, however, the vol-
ume producers were unable to take full advantage of
the dollar's strength during 1981-85 and continued to
lose market share in the United States.
Western Europe also has lost market share because
several LDCs have established their own automobile
production facilities and are both competing for ex-
port sales and closing off their own domestic markets
to European producers. As more newly industrializing
countries begin developing their own automobile in-
dustries, West European automakers are likely to be
squeezed out of additional markets. For example,
South Korea, following its success in electronics, steel,
and shipbuilding, is determined to become a major
automobile exporter. Other LDCs, such as Taiwan,
India, and Malaysia, are increasing their production
of automobiles and are relying on domestic markets
for sales. These countries are adopting high tariffs
and stringent local content laws on auto imports, as
well as tying automobile imports to exports of other
products. The decline in Western Europe's shipments
to Africa and Latin America already amounts to
almost 37 percent since 1980, compared with only 25
percent for Japan.
Capacity and Investment
Chronic overcapacity is a major problem plaguing the
volume producers. Industry experts believe West
European production capacity must be cut 20 percent,
by 2.2 million units, to bring supply in line with
demand and restore profitability for all the volume
producers. Not all producers, however, accept this
logic. Peugeot, for example, is seeking to boost its
capacity from 1.85 million units to 2 million units.
Peugeot officials want to increase production capacity
and flexibility to be able to respond better to changes
in market demand.
Past investment decisions have exacerbated the capac-
ity problem. Before demand slipped in 1981, West
European automakers primarily concentrated their
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New technologies in the automobile industry fall
primarily into three categories: flexible manufactur-
ing systems, industrial robots, and computer-aided
design and manufacturing (CAD/CAM) systems.
Each of these systems can reduce production costs,
but combining all three provides the greatest im-
provement in efficiency and flexibility. Many of the
small, specialty producers are reducing their costs by
investing in these systems to improve productivity,
lower break-even points, and reduce unit labor costs.
All of the volume producers are moving in this
direction with Fiat and Volkswagen leading the way.
Flexible manufacturing systems consist of a line of
machine tools and transfer machinery that are pro-
grammed to produce either several types of compo-
nents or the same type of component according to
different specifications. When applied to the casting
and machining of an engine block, for example, such
systems permit one transfer line to produce four-or
six-cylinder engines where previously two lines had
been required.
Industrial robots with artificial limbs and a degree of
mobility can be used in welding, painting, and per-
forming other tasks potentially harmful to human
investment activities on expansion, model upgrades,
and changeovers. Afterwards, when demand fell flat,
emphasis shifted toward becoming more efficient and
cutting capacity. Mounting losses, however, have
slowed the industry's progress and efforts to increase
automation also have run into stiff union resistance.
The accelerating product-life cycle, primarily brought
about by changes in technology, is increasing the
industry's investment and production costs and fur-
ther intensifying competition. Historically, West Eu-
ropean car models have lasted eight to 10 years. To
remain competitive, however, West European produc-
ers must now restyle product lines more frequently
and incorporate new technologies. Consequently, the
beings. Given the current limitations of robots, work
must be brought to them; consequently, it is more
efficient to combine robots with flexible manufactur-
ing systems that already have material-handling ca-
pability. Robots save costs by improving quality,
eliminating the need for inspectors, reducing absen-
teeism, and working longer hours in poor working
conditions. Renault claims that by installing robots it
has increased output at its Douai plant by 20 percent.
Computer-aided design (CAD), using minicomputers
and sophisticated software packages, increases the
speed and efficiency of component design. CAD sys-
tems allow designers and engineers to improve the
accuracy of measurements, ensuring the uniformity
of parts. Designers are tying these systems to comput-
er-aided engineering packages that ease the task of
calculating shapes and choosing the best materials
for specific functions. Computer-aided manufacturing
(CAM) systems transfer coded instructions from the
CAD cathode ray terminal to the robots and machine
tools needed to fabricate the parts.
time over which each model provides profits has been
shortened, but more capital expenditures are required
for product development.
A generally inefficient supplier base in Western Eu-
rope has slowed the pace of innovation and raised
inventory costs. Although inventory policy is chang-
ing, West European automakers have typically pur-
chased most parts from medium-sized independent
suppliers and have maintained high inventories be-
cause of the risk of strikes. In contrast, the close
relationship between Japanese automakers and parts
suppliers has allowed them to maintain a "just-in-
time" inventory policy, keeping stocks and working
capital requirements much lower than in West Euro-
pean firms. Also, the lag in investment in Western
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Europe relative to Japan for the development of state-
of-the-art automobile components has probably been
caused, in part, by the lack of integration between
West European component suppliers and automobile
manufacturers.
The Road Back to Profitability
West European automakers are experiencing various
degrees of success in their efforts to become more
competitive. They are now directing most of their
investment into robotics, flexible automation, and
sophisticated machine tools to improve efficiency and
reduce their break-even point (see inset). Fiat and
Volkswagen are making the greatest use of automa-
tion in Western Europe and are also the ones who
have shown the most dramatic turnaround in profit-
ability. Relations among firms are also changing, with
joint ventures becoming a popular means of pooling
technological and marketing skill, as well as increas-
ing economies of scale at both domestic and interna-
tional levels. Product collaboration is limited, howev-
er, by political and union pressures.
Fiat, which already has about 900 robots in operation
today, pioneered their use in 1972. The firm's new
Mirafioire plant, near Turin, is at the industry's
leading edge, in terms of technology. The cost of
Fiat's R&D and modernization during 1984-87 will
total nearly $5.5 billion. Fiat can now break even with
production of only 1 million units, compard with 1.5
million in 1980, largely through these efforts.
Volkswagen also is an industry leader in the use of
automation, employing about 1,200 robots now, with
2,000 projected by 1990. Volkswagen spent roughly
$3.4 billion during 1982-83 to modernize its facilities,
despite disappointing financial performances both
years. The futuristic Wolfsburg plant, which produces
the Golf, boasts what company officials believe is one
of the world's most modern production facilities. In
addition to a fully automated and flexible body-
welding line and robotized paint shop-features com-
mon to many automobile plants-the Volkswagen
facility also uses robots to install engines, brakelines,
batteries, and wheels. This system can produce not
only the Golf but also the Jetta without a change of
tools or a halt in production.
Fiat and Volkswagen are relying on flexible automa-
tion to build automobiles with 30 to 50 percent less 25X1
direct labor than they used at the end of the 1970s.
Traditionally, West European automakers had to run
off at their various plants about 250,000 copies per 25X1
year of each body style and about 500,000 copies of
each engine and, transmission to achieve full econo-
mies of scale. With flexible automation, West Europe-
an automakers may still have to sell at least 250,000
vehicles out of one plant, but one plant will be able to
make different models without any production-line
interruptions, resulting in significant cost savings. 25X1
Increased manufacturing flexibility is reducing the
heavy investment required for design changes and
retooling that previously had required shutting down
for several months.
In their search for greater economies of scale, West
European automakers are increasingly turning toward 25X1
joint ventures to reduce design and production costs,
particularly for engines and transmissions. Fiat, Lan-
cia, and Alfa Romeo of Italy, along with Saab of
Sweden, are engaged in a cooperative effort to develop
a new range of cars toward the upper end of the 25X1
product line for each company. Saab's version, the
9000, is the first of the foursome to debut. Saab
credits the venture for lowering costs of building
prototypes and developing and testing components. 25X1
Fiat estimates that work was done for about
$50 million among the four that would have cost
$80 million if undertaken separately.
Further product collaboration in Western Europe is
limited by interference from politicians and unions,
particularly when it involves shifting components
across national boundaries. Fiat supplies Saab with
only a few dozen stampings for the 9000 and claims it
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could easily ship more at prices 10 to 15 percent below
the cost of the same pieces made in Sweden. Objec- 25X1
tions by Swedish unions prevent Fiat from contribut-
ing more. Peugeot and Fiat collaborated on a new
Italian engine plant but Paris insisted that the engine
be produced in France as well. Fiat is moving ahead
and also plans a three-cylinder derivative while Peu-
geot, in response to Paris's objections and because of
changing priorities, has no immediate plans for the
engine.
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but that is likely to be difficult to achieve.
West European automakers will continue to face stiff
competition, low profitability, and excess capacity
over the next several years. Price will remain of
secondary importance at the upper end of the market,
but it will still play an essential role at the lower end,
keeping the pressure on the volume producers' profit
margins. Furthermore, buyers in the mass market-
apart from Italy and France-can easily switch to
Japanese imports. As a result, reducing costs will
become even more important over the medium term,
without com-
be allowed to fail.
pensatory capacity shedding, the West European
automobile industry will increase its capacity by
about 1 million units to 14 million by 1990. National
pride and political realities, however, make it very
unlikely that any of the mass-market producers would
operations.
Joint ventures involving West European firms are
likely to increase but will not necessarily solve all of
the industry's problems. Other problems may arise in
addition to political and union obstacles. Mergers of
equals are unlikely to succeed unless one of the
partners is willing to sacrifice its identity; and merg-
ers of two inefficient firms, of course, may not
produce a single efficient one. Renault has little to
show for its interest in American Motors, and Peugeot
nearly crippled itself by buying Chrysler's European
near term.
Within the West European market, the subsidiaries of
GM and Ford are likely to achieve competitive advan-
tages in the years ahead. Both firms are able to
collaborate with their US parents and with their Latin
American counterparts to take advantage of the econ-
omies of scale these relationships offer. This is likely
to promote better decisionmaking, improve product
development, and optimal adjustment of plant size.
The market shares held by the other major volume
producers are highly dependent on home-market per-
formance. In the case of GM and Ford, the existence
of more than one "home market"-West Germany,
Britain, and now Spain-gives them a good base from
which to increase their relative market shares in the
Table 2
Western Europe:
Automobile Density
Automobiles per
1,000 total population
West Germany
377
390
431
464
France
356
373
390
414
United Kingdom
276
285
321
341
Italy
311
346
379
405
Netherlands
309
325
340
361
Belgium
321
329
349
367
Denmark
271
265
282
294
Spain
202
221
241
259
Ireland
216
204
218
231
Portugal
95
104
117
126
Greece
91
96
114
120
a Estimated.
b Projected.
The continuing drive to restructure the West Europe-
an automobile industry could be slowed by political
considerations. As firms strive to increase productivity
and competitiveness over the next two years, more
layoffs will be required at a time when the socialists in
West Germany, France, and the UK will be vying for
a comeback in national elections. Union disturbances
are most likely during these election campaigns when
the employment issue would draw more attention.
Spain, Greece, Portugal, and Ireland have relatively
lower automobile densities than other West European
countries, and offer the best growth potential to
automakers (see table 2). The Spanish auto market,
fifth-largest in Western Europe and more than double
the size of the other low-density markets combined, is
still immature and protected. As import barriers
gradually come down because of EC accession, Spain
will become more attractive as an export market.
Sales in Spain peaked at 660,000 units in 1977 and
only 540,000 units were sold in 1985; DRI projects
575,000 sales in 1986. Exports from Spain also can be
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expected to increase over the next few years. Low
Spanish labor cost and the country's entry into the EC
in 1986 make it an ideal base for both production and
export.
Trade restrictions against Japanese imports are likely
to remain, leaving little opportunity for Japanese
manufacturers to increase direct imports substantially
beyond their current 11-percent market share.
Mounting trade frictions with the EC prompted
Japan's Ministry of Trade and Industry (MITI) volun-
tarily to limit the increase in exports of vehicles to the
EC to no more than 10 percent over the 1985 level of
1.1 million cars. Japanese automakers, however, prob-
ably will continue circumventing restrictions by ex-
panding plant operations in Western Europe: Nissan
already has a site in Britain, Honda is considering
expanding its assembly operation with Austin Rover,
and Toyota is looking into setting up its own opera-
tions in Western Europe. The Japanese are likely to
use their West European plants to concentrate on
producing low-priced automobiles while boosting their
exports of high-profit models.
Japanese expansion in Western Europe is likely to
exacerbate EC-Japanese trade relations. The Com-
munity has often criticized Tokyo for barriers pre-
venting the penetration of Japanese markets. If, as we
expect, the Japanese continue to increase their share
of the West European automobile market-even if
accomplished by direct investment-it is likely to fuel
resentment and protectionist sentiments against Japa-
nese automobiles, and almost certainly other Japanese
imports, including consumer electronics, machine
tools, and semiconductors.
The challenges still facing the West European auto-
mobile industry indicate that the volume producers
will experience an uncertain profitability picture for
the medium term and remain highly vulnerable to an
economic downturn in the short term. The progress in
restructuring so far, while significant, has not brought
the European producers close to Japanese production
efficiency. And, in the future, automakers will find it
even more difficult to achieve additional gains. The
amount of investment required for further restructur-
ing will be high, and because of the poor profit
outlook, returns will be marginal. Barriers to a more
flexible labor market-union demands and hard-to- 25X1
remove labor laws-and protectionism will continue
to be the major impediments to streamlining initia-
tives. Marginal improvements in competitiveness,
however, will not enable the West Europeans to beat
back the Japanese, who will continue to mount a stiff
challenge. New low-cost competition from South Ko-
rea is providing strong incentive for the Japanese to
improve their production efficiency. Furthermore, de-
spite their recent improvement, the West Europeans
have failed to recapture lost shares of third markets
and they are unlikely to do so in the near future.
Western Europe's only competitive advantage lies at
the top-end, luxury class segment of the market,
which the Japanese have just begun to target.
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