Why Europe is a disaster zone for car companies

June 21, 2013: 5:00 AM ET

From cantankerous unions to soft demand, car makers of all stripes are finding the continent a vexing place to do business.

By Doron Levin

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FORTUNE -- European automakers are keeping fingers crossed every month for a ray of sunshine that tells them the worst market in memory might be ready to improve. It didn't happen again in May, when sales were lower than in any May since 1993. Registrations dropped 5.9% year over year to 1.04 million.

Worse still, analysts are saying things won't be getting better in Europe for a long time due to shattered consumer confidence. Alix Partners of Southfield, Mich. reports in a new study that car buying on the continent might not improve until 2019.

The political and economic repercussions are immense for the industry because weak demand for vehicles has pushed factory capacity utilization to lows not seen for more than half a century. Governments have spent billions in incentives to prop up buying and now must contend with layoffs in connection with idle factories.

PSA Peugeot, Fiat, Renault, Opel -- owned by General Motors (GM) -- and Ford (F) have been especially hard hit, along with plants in southern Europe. Automakers like BMW, Daimler, and Volkswagen -- prosperous in global emerging markets and selling to premium buyers -- have so far avoided the worst financial pain.

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Dieter Zetsche, Daimler CEO, tried to put the best possible face on the position of his company, which makes Mercedes-Benz vehicles. He told the Financial Times this week that "we are feeling growth impulses, but they are coming from our (new) products. In the last months we've had significant positive growth rates in difficult markets."

The only country running counter to Europe's trend is the United Kingdom, where auto sales rose 11% in May. The U.K. may be faring better because, having opted out of Europe's common currency, it is not as tied to the continent's economic troubles.

Theories abound as to what might be holding consumer confidence back and what might have to happen for the public to cheer up. One is that the German election this fall, in which Angela Merkel is seeking a third term as chancellor, pits her against a candidate that is talking about "wealth inequality." In the event of a left-leaning government and higher taxes, the expectation is that economic growth might be held back.

Because Germany is considered to be the financial growth engine for Europe, any doubts about that country's economic future spill over onto neighbors, especially countries to the south, where fiscal woes have been toughest.

Europe is notorious for its rigidity in manufacturing. Automakers complain that governments and European Union rules have tied their hands, giving them insufficient opportunity to close plants, lay off workers, or cut production when demand falls. Not surprisingly, some automakers such as GM and Peugeot Citroen are collaborating to cut costs and lower risk.

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Alan Mulally, Ford's chief executive, said this week in India that Ford will be exporting more vigorously from that country to Europe. Ford plans to export its EcoSport small crossover from a plant in Chennai later this year.

On top of the weak economic demand, automakers are battling changing tastes among young consumers, who more and more no longer regard cars as status symbols. That's one reason why top-notch infotainment systems are becoming more important to the selling of vehicles, perhaps as much as horsepower and fuel economy.

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