European governments are coming under increasing pressure to rescue their automakers as the economic crisis continues to hurt the region’s motor industry. The decline has spread across Europe with both Eastern and Western European auto industries showing signs of a slump. Sales were down 22.6 percent. Poland and the Czech Republic were the only two countries in the region to register positive growth. However, figures from the ACEA, the European Automobile Manufacturers Association, reveal the biggest declines occurred in Western Europe where Spain saw new car sales plummet 49.6 percent, the UK 36.8 percent, Italy 29.5 percent and Germany 17.7 percent. The figures have prompted widespread layoffs and plant closures across Europe as motoring executives press their governments for direct aid.
 
The problem is that the supply system is very inflexible. Car manufacturers are not able to deal with short-term demand fluctuations and related overcapacity. It is very important that improvements are made in this regard, so that high stocks at importer and dealer level can be avoided.
 
The drop in consumer spending has been blamed for the slump in car sales across Europe.

Worse still, transferring facilities to Eastern Europe to manufacture at a lower cost has not proved cost effective for carmakers. The heavy costs, both political and financial, of closing plants in Western Europe have eaten away at any potential savings. Furthermore, plants in CEE have proved less cost effective than first thought because of rising wages and lower productivity levels. Being further away from target markets in Western Europe has also made logistics more expensive. Then there is the issue of political interference. Alan Tilley, a principal at Bryan, Tappy & Tilley LLP, thinks the pressure governments have put on automakers to reduce fuel emissions has seen more money devoted to green issues rather than fuel efficiency and lower break even points. He believes this has contributed to the inability of firms to cope with the current climate.

Clearly, the misjudgements made when forecasting market trends and not anticipating changes in consumer tastes have led to suffering in the European auto industry. Customers are now demanding value, affordability and fuel economy, whereas previously they sought luxury and performance. The market for luxury cars has nosedived, with a 26.6 percent decline in sales at Porsche, for example. This may reflect the decline in company bonuses in high-end employment. At the same time, the Smart car has seen sales double, as consumers look for smaller, more economically efficient vehicles.

However, some experts believe that auto management teams cannot be wholly blamed for the decline in industry sales. They argue the sector has been reasonably well run, but is now being tested by unforeseen market conditions and malformed policies. “One wonders whether a more informed and robust industry response to minority group green issues would have moved the public sentiment more in line with the insatiable public appetite for motoring and allowed OEMs to concentrate on cost and efficiency issues, their major survival challenges,” says Mr Tilley. He adds that the industry has been distracted from concentrating on key areas such as efficiency, which has resulted in the current predicament.

Adaptation, handouts, and survival

Difficult market conditions mean that companies will have to implement strategic changes quickly if they are to survive. “In the short term, firms have to focus on cash and liquidity, to manage structural costs, to assess and support the dealership performance and to stay focused on innovation. They have to ensure alignment with core strategy and clearly define the change imperative whilst establishing bold goals for the entire organisation. No ‘sacred cows’ or ‘hobby farms’ are permitted - everything in the business portfolio is within the scope,” says Mr Wentzler. Everything is open to scrutiny and wholesale changes are required, starting with a reduction in capacity to prevent the sector going further into oversupply. Over time, automakers will have to reduce their brands in order to simplify operations and increase the life cycle of individual models. Mr Van Overbeek believes auto companies should become innovators and experiment with their business models. “For too long now, they have continued on a road much travelled. Car distribution has not changed for the past 50 years, particularly in the EU.