Europe’s chronically loss-making car industry needs a “car Tsar” along U.S. lines to force closure of a quarter of its capacity, according to a report from investment bank Credit Suisse. If this doesn’t happen, Europe’s car makers will be kept afloat by national governments and long-needed reform will be put off again.
The bank nominates former Ford Chief Financial Officer Lewis Booth to take on this poisoned chalice. There is no word so far whether Booth likes this idea.
Credit Suisse said Peugeot-Citroen of France is the most vulnerable of European mass car manufacturers, saying $5.8 billion of cost-cutting measures have so far failed to halt cash outflows, as sales sink and discounting costs rocket.
Earlier this year General Motors bought a seven per cent stake in Peugeot, and announced a long-term alliance to cut costs and eventually produce vehicles together.
Peugeot is in such deep trouble, Credit Suisse believes the French government may be forced to intervene to save it, if a car Tsar isn’t appointed to coordinate closures.
The Tsar would be appointed, and the programme financed, by the European Union.
“The E.U needs to accept responsibility for the restructuring and establish an automotive task force which can coordinate capacity reductions among European manufacturers and which is capable of removing the first-move disadvantage that currently keeps automakers from committing funds to plant closures in a politically uncertain environment,” the report said.
If this doesn’t happen, Credit Suisse believes national governments will be forced to save their national champions, like Fiat of Italy, and this would perpetuate the Europe’s inefficient car industry.
“The French government may seek to assist Peugeot, in the absence of a co-ordinated European approach. In our opinion, such an intervention would lead to a “Big Bang” where other governments look to support their (leading manufacturers). These actions are liable to serve domestic agendas at a cost to the broader industry,” the report said.
Last month Citigroup Global Markets raised its forecast for PSA Peugeot-Citroen automotive division’s loss for 2012 to more than $1.1 billion and worried that 2013 will see more red ink.
“We are increasingly concerned about cash generation in 2012 on falling European market share which we also think negatively impacts what we regard as the core value of the group – its financial services operations,” Citigroup said.
Credit Suisse said 60 per cent of new cars in Europe are sold by brands making losses.
“Since 2002, $22 billion has been removed from the value of Fiat, Peugeot-Citron and Renault (of France). The current predicament is not solely the result of weaker end markets, but weak strategies leading to poor returns; today’s strategies seem equally questionable,” the report said.
“We believe the appointment of a car Tsar” is crucial to a coordinated plan. Capacity cuts of 24 per cent are required at Europe’s mass (manufacturers) if utilization is to reach rates enjoyed in the U.S. where 21 per cent was removed,” the report said.
“We believe Peugeot is most at risk given we forecast cash consumption through 2012 and 20123, with the risk compounded by refinancing requirements of $1.2 billion next year,” the report said.
Credit Suisse said the issue is coming to the fore because it expects a more severe downturn for 2012 than originally expected and only a muted recovery in 2013.
“We believe that cash positions will continue to deteriorate to a point where further external funding will be necessary in either late 2012 or early 2013 giving rising debt refinancing needs.”