Europe's auto makers have been given a bad steer by France. The country's political leaders are insisting Peugeot protect jobs in return for a bailout. That has understandably given General Motors jitters about turning an alliance with its French rival into a full-blown merger. Such combinations are among the best ways for the continent's car industry to become solidly profitable again. Governments ought to help, not hinder, the process.
Much of Europe's car manufacturing is a mess. Around half of vehicles are produced at a loss and another 10th just about break even, according to Credit Suisse. At least a quarter of factory capacity sits idle. Overall installed capacity would need to be slashed by 24 per cent for the industry to reach U.S. levels, where all three of Detroit's giants are now making decent money.
Even some recent bright spots have not helped. The industry posted record car sales last year. Yet that wasn't enough for either Peugeot or Fiat to generate positive free cash flow in their core businesses, even though Peugeot, for example, is implementing almost €5-billion ($6.4-billion) of cost cuts and a €1.6-billion asset-sale program. The company is still slated to burn more than €2-billion of cash this year.
That's unlikely to be reversed next year, when the company has more than €1-billion of debt coming due. Small wonder the Peugeot family, which controls some 38 per cent of the company's voting rights, was desperate for help. Merging with GM's European arm, Opel, could have been the solution. One option, according to Reuters, envisioned GM folding Opel into Peugeot and handing over $5-billion to cover losses and restructuring.
Instead, Peugeot plumped for an €18.5-billion refinancing deal from Paris, including a condition the company consult with the government on strategy. Industry Minister Arnauld Montebourg said last month he expected Peugeot to "preserve all its French sites."
That reduces, if not removes entirely, the incentive for other car companies and state authorities to make the necessary sacrifices. A smooth ride for Europe's car industry remains a long way off.