Why the US and European Auto Sectors Continue to Diverge
The contrast between the US and European auto markets is stark and captures the significant divergence of the two economies. June auto sales in Europe slumped from a year ago to their lowest level since 1996. In June, US auto sales reached its highest pace since late 2007. US sales are up 11% since last June and are 75% above the low point in early 2009.
The UK continues to be the only major bright spot in Europe. Sales have risen for 16 consecutive months. June sales were 13.4% above a year ago. In contrast, German sales were off 4.7%. Italian sales were off 5.5%, while French sales were off 8.4%.
Sales by Peugeot-Citroen were off 10.8%. Fiat sales were off 12.6% and GM saw almost a 10% decline. Renault's low cost (Romanian) brand Dacia, saw a 175 increase, while Ford reported an 8.1% increase.
The EU has the capacity to produce a little more than 19 mln vehicles a year. Sales in 2012 were 13.1 mln and this year they are projected to fall to 12 mln. In 2008, 16 mln cars were bought in the EU.
Given the contraction in the euro area and UK, one might want to dismiss the excess capacity as cyclical in nature. However, this is to miss three of important points. First, even in the best of times, Europe grows slowly and the institutionalization of ordo-liberalism warns of a protracted period of slow growth ahead. Second, Europe is on the cusp of significant demographic changes with a number of countries poised to experience declining as well as aging populations.
Third, there is a shift in the global division of labor and auto production is moving east. While Italy, Spain and France have seen sharp declines in their auto output for more than a decade, output in the Czech Republic and Slovakia has grown 3-fold in the past 10 years and now produce more than France. Slovakia, incidentally, has the highest auto output per capita in the world.
Reports suggest Russia has a growing domestic market and is set to surpass Germany. Romania is poised to surpass Italy in auto production. Italy's auto factories are operating near 45% of capacity. The older and less efficient capacity is in the euro area. Some capacity has been shuttered, and Ford has announced closure of three factories.
However, the closures insufficient for industry analysts to anticipate profitable production any time soon. Moreover, with high levels of unemployment and weak economies, Italy, Spain and France have indicated that they will not tolerate any more rationalization of the European auto industry--plant closings--at their expense.
There are couple factors that seem to help explain the stronger US auto recovery. First, the bankruptcy of General Motors and Chrysler and the near-death experience of Ford, helped spur on an industry restructuring. It included the closure of capacity. All three are now operating profitably and operating near 90% capacity. They are being cautious about adding capacity, according to industry reports. The normal summer shutdown is being foregone this year. In contrast, Europe has been slower to restructure continent's auto sector and despite the Economic and Monetary Union (EMU), many, if not most industries, remain highly fragmented.
Second, the US officials quickly moved to reanimate the asset-backed security market, which allows lenders to securitize auto loans. This has been a significant part of the rise in non-revolving US consumer credit.
Third, the US labor market has gradually improved. Leaving aside the unemployment rate, which is really more about the participation rate, the US economy has generated roughly 4.5 mln jobs over the past two years. The point is not about the strength in absolute terms, but relative to Europe. The housing market in the US has also improved, with Case-Shiller house price index rising at its strongest pace since mid-2006. These two consideration help underpin demand for durable goods.
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