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Dec 3, 2012 | 11:15 GMT

8 mins read

Problems in the Car Industry Strain the European Union

Nissan cars are pictured, parked in a lot at its' Sunderland plant in north east England on March 16, 2019.
(ANDY BUCHANAN/AFP/Getty Images)

The automotive industry, an important part of Europe’s industrial base, is burdened by overcapacity and declining sales. The European Union is working to coordinate the industry's restructuring while governments try to mitigate negative effects on their domestic industrial bases and labor markets.

A continued drop in car sales in Europe will mostly harm European manufacturers. The reforms countries introduce to protect their own industries will show how governments struggle to strike a balance between protectionist measures and reforms aimed at making their industrial bases more competitive. The trade and industrial policies favored by individual countries will likely strain relationships among EU members.

Negative news regarding the European car industry has proliferated in recent months. In October, the French government indicated it would provide financial aid to struggling car manufacturer Peugeot Citroen in order to avoid layoffs. In Belgium, protests over prospective job losses followed a November announcement by U.S. car manufacturer Ford that it would close a production plant in the country by 2014. Last week, Polish media reported that production at a plant in Tychy owned by Italian car manufacturer Fiat was at a standstill because of low orders.

The European Union is well aware of the industry's struggles across Europe. In early November, the European Commission presented its CARS 2020 Action Plan, which outlined how Brussels hopes to reform the European car industry. In the coming weeks, Antonio Tajani, the EU commissioner for industry and entrepreneurship, is expected to present more concrete plans after meeting with trade unions, car manufacturers and governments across Europe.

Europe’s Automotive Industry

The European Commission stated in October that the union needs a wave of re-industrialization. Accounting for 20 percent of the European Union's gross domestic product in 2000, industry now makes up 16 percent of the bloc's GDP. Europe will need growth in the car industry if the Continent is to regain levels of industrial production comparable to those seen a decade ago. The production of automobiles is an important component of the European industrial base; supply chains expand across countries, and the automotive industry is linked to steel, plastics, electronics and several other industries. 
 
The European Automobile Manufacturers' Association reported that the automotive industry directly and indirectly employs 12 million people across Europe and that it is the largest private investor in research and development. Eurostat, the European Union’s statistical office, reports around 2.3 million people in the European Union are directly employed in vehicle manufacturing — about 1 percent of total EU employment. Around 1.2 percent of the European Union’s GDP comes directly from the manufacturing of motor vehicles. 
 

Europe will need growth in the car industry if the Continent is to regain levels of industrial production comparable to those seen a decade ago.

Germany is Europe's largest car manufacturer. According to the European Automobile Manufacturers' Association, some 750,000 people worked in the German automotive sector in 2010. France (200,000 employees) and Italy (170,000 employees) were a distant second and third. Germany also holds around 30 percent of the European market share in the automotive sector. During the financial crisis, the German government subsidized the purchase of new cars to support the hard-hit German car industry. German car manufacturers are doing relatively well compared to others in Europe, mostly because German brands have managed to grow in other markets, especially in China.
 
In 2011, France was the second-largest car producer in Europe, just edging out Spain if trucks and buses are excluded. The French government is looking for ways to support its struggling automobile industry, which focuses its sales mostly on the European market. The French car industry has not had a trade surplus since 2007, an indication of how French producers have lost competitiveness even to newer EU members.
 
Eastern and Central European countries have strengthened their positions in the automotive industry compared to Western Europe. The Czech Republic and Poland are Eastern and Central Europe's largest producers — they even rank ahead of Italy, which has traditionally had a strong car industry. Foreign investment into Central and Eastern European automotive industries grew significantly in the years leading up to the financial crisis in 2008. Investment tapered off during the crisis, but over the last decade the region's automotive industry (especially in Poland, the Czech Republic, Hungary and Romania) has become more prominent, while it has dropped in significance in Western Europe. For instance, Eurostat figures indicate the number of employees working in vehicle manufacturing in Western Europe fell over the past decade while it increased in Central and Eastern Europe. Moreover, the percentage of value added to GDP by the sector increased in Central and Eastern Europe while it decreased in Western Europe (with the exception of Germany).

Problems

As new car registration drops for the fifth consecutive year, the industry is struggling with production overcapacity. To overcome this problem, manufacturers have tried since the outbreak of the economic crisis to consolidate production across Europe. However, no country or company is willing to give up production sites and workspaces in order to ensure the wellbeing of its competitors, and efforts at coordination have largely failed. 
 
Overcapacity has long been a problem and will likely become even more prominent. Due to the current economic crisis, car sales are expected to drop further — and even more so if we consider the longer-term ageing and decline of the European population. In 2011, 21 percent of worldwide vehicle sales occurred in the European Union. The European Union has the largest car fleet in the world, heavily concentrated in Western Europe. A reduction in car sales will have a global impact, but it will do the most harm to manufacturing plants in Europe, where around 85 percent of cars are produced, including cars produced in Europe by foreign companies. 
 
Central and Eastern European countries could be harmed substantially if foreign investors withdraw. Some of these countries have been building up their automotive sectors over the past decade but still lack the financial capacity to support their industries like Western European governments do. Outside Europe, Japan, which accounts for around 28 percent of EU car imports, would be most negatively affected by falling sales because it is the largest car exporter to Europe, followed by the United States (20 percent) and South Korea (14 percent).
 

A reduction in car sales will have a global impact, but it will do the most harm to manufacturing plants in Europe, where around 85 percent of cars are produced, including cars produced in Europe by foreign companies. 

The closure of car production plants and reduced investment by car producers are sensitive issues in Europe and lead to protests by labor unions. However, such conditions also indicate that a country’s industrial base is struggling to remain competitive. This is the case in France and Italy, where governments want to increase industrial competitiveness but cannot push through sweeping reforms because of resistance from labor unions. Instead, leaders are urged to shield domestic industries from outside competitors. This is controversial in the European Union, where the common market limits a country’s ability to introduce protectionist measures. Because of the current crisis, other EU countries will more heavily scrutinize potential protectionist policies. Eastern European countries will be especially wary of measures meant to protect production sites in Western Europe. The debate surrounding the protection of national automotive sectors could strain Europe’s common market. It could also further complicate free trade agreement negotiations that are currently under way with Japan and other countries and about which the car industry is skeptical.
 
The tendency toward protectionism will probably be strongest in countries with strong labor unions, such as France and Italy. The German automotive sector is still relatively resilient, but an eventual slowdown by the largest producer will ripple throughout the Continent since Germany sources parts from other countries. Central and Eastern European countries will struggle most to protect their sectors because their governments do not have the same financial resources as Western countries. Focusing on exports to relatively close markets such as Russia and Turkey will become more important. These two countries account for around 9 percent and 7 percent, respectively, of EU car exports.
 
The automotive industry illustrates how the economic crisis is exposing the weaknesses in Europe’s industrial base and how the unique position of each country affects its approach to problems. As the sector transforms, the strength of labor unions in certain countries, as well as differing interests in trade policies, will become more apparent. This could strain the European Union's approach to common industrial and trade policies.

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