GENEVA/BRUSSELS (Reuters) - Under the lights of the Geneva motor show in March, Europe's top auto executives boasted about the new features of their latest models and tried to out-hype their rivals.
The next morning, in a hotel conference room just across the way from Geneva's convention center, the same executives all sat down to work out how to fix their huge overcapacity problem.
At a board meeting of the European automaker's lobby group ACEA, the bosses of Volkswagen, Daimler, BMW, Peugeot, Renault, Fiat and Opel decided it was time to discuss the elephant in the room: plant closures.
"Their fear was of an all-out price war," said a source who was briefed about the meeting but declined to be named. "The negative fallout from that would be terrible."
The hard truth is that after more than four years of falling demand and profits, Europe's carmakers have yet to restructure or consolidate. Many factories are running at partial capacity - analysts estimate automakers have cut some 3 million cars, or 20 percent, from their production lines - and still producers struggle to sell their wares.
At the Geneva meeting, ACEA President Sergio Marchionne pressed members to call on Brussels for political cover to start shutting down factories.
"Closures should be co-ordinated at EU level," the Fiat and Chrysler boss told them, according to the person briefed on the meeting, to get around "a game of chicken" played by the producers where the first company to close plants would take the brunt of the cost and leave the rest to benefit.
A GAME OF CHICKEN
Europe's carmakers survived the initial economic downturn in 2009 by turning to national governments for help.
Germany, France, Britain and other countries offered some 30 billion euros in financing and incentives to companies and car buyers to support an industry upon which 12 million families depend for their livelihoods. But there was a conspicuous lack of pressure for companies to restructure or merge - governments battling the financial crisis did not want to have to deal with yet more job losses. In France the government explicitly awarded the money on the proviso that its automakers did not shut any plants.
In contrast, U.S. carmakers were forced to overhaul their businesses in return for their massive $81 billion bailout, when Chrysler and General Motors were supported through bankruptcy.
But where the American industry has rebounded strongly, Europe's carmakers muddle on. Some, such as German firms BMW, Mercedes-Benz and Volkswagen, have enjoyed big profits on the back of demand for premium models. Others - Peugeot, Fiat and GM's Opel - have struggled. Many rely heavily on discounting, continuing to fund price cuts set up initially as government cash incentives for new buyers. Rebates in Germany and Italy reached an all-time high in March of 30 percent off the sticker price.
Automakers contacted by Reuters declined to give details about current capacity levels at their plants. In a May 1 report entitled "Can the EU ignore industry calls for help?", UBS published some estimates based on data from market research firm IHS and concluded that BMW and VW are running their plants at over 90 percent of capacity, while Renault is at an estimated 76 percent, followed by GM and Peugeot at 75 percent. Ford is at 70 percent and Fiat at 65 percent. Those rates are "barely at breakeven level at the top end of that range, and squarely in loss for a number of them," the report says.
So it is no surprise that many in the industry have concluded that the solution is to close some of the 187 vehicle factories in the EU, Russia and Turkey.
The problem is, not everyone agrees. At the ACEA meeting Marchionne's argument was fiercely opposed by the three German manufacturers, whose brands continue to sell well.
Martin Winterkorn - boss of VW, which is the second biggest carmaker in the world and runs its plants at almost full capacity - argued that manufacturers should instead invest outside Europe and improve their technology and fuel efficiency.
That may be true, in the long run. But what everyone in that meeting also knew is that VW is forced to offer some of its cars at huge, company-subsidized discounts. The Seat Ibiza, for instance, was the deepest discounted model in Europe in March, according to the Center for Automotive Research at the University of Duisburg-Essen. Buyers in Germany could snap up the Ibiza with zero deposit and zero interest financing for five years, at a monthly payment of just 99 euros - a 27 percent discount from the 10,990 euro sticker price.
EU OPTIONS
Carmakers are now waiting to hear what kind of assistance Brussels will offer. Industry Commissioner Antonio Tajani and ACEA chief Marchionne will unveil suggested remedies for the struggling industry on June 6.
A policy group called CARS 21, which gathers ministers from EU member states, auto executives, EU commissioners, and trade union representatives, also argues for EU support and has drafted a series of suggestions. Germany, France, Italy, UK and Spain - where the problem of overcapacity is worst - are likely to welcome acknowledgement from the EU that the auto industry is in crisis, since it will provide political cover for the job losses that come from plant closures.
However, carmakers hoping for the kind of support offered to European steelmakers in the 1980s - when restrictions on state aid were lifted to fund financial help and production quotas - are likely to be disappointed.
According to a CARS 21 spokesman, Tajani is expected to urge the EU to increase funding for research and development, and help coordinate how it is spent.
The report suggests he is also likely to ask for cuts to the EU's costly maze of safety and environmental regulations, a burden which the industry has repeatedly cited as the main source of price inflation.
His third recommendation may be in the area of trade policy - a hot button issue particularly in the wake of the EU's Free Trade Agreement with South Korea, which began in July 1, 2011 and has seen 150,000 extra Korean cars on Europe's roads.
One source who has taken part in CARS 21 meetings, said some carmakers have grumbled in the corridors during breaks in the meetings that the EU should consider an import tariff. For now though, this is still far from being an official proposal.
"Some car makers feel that the only way to deal with the import situation is a 20 percent tariff," said the source, who added that no such plans are underway.
Governments may offer help with retraining workers, but Europe's stalled economy is producing few jobs.
In 2009 in Turin, Italy, the government set up such a scheme to help thousands of workers who were laid off in several industries. They included employees of Fiat, which has postponed investment in new models. When the program first started, about 60-65 percent of workers were finding new employment. Now, of the 69,000 people participating in the scheme in December 2011, only about 20 percent are re-employed, many on short-term contracts.
MAP OF GLOOM
Even if the EU is able to help cushion the fallout from plant closures, it's likely that the manufacturers will bear the biggest costs.
The good news - for the automakers, if not workers - is that unlike in 2009, European carmakers generally have enough cash to shut plants.
"Looking at the balance sheet positions, we think that the weaker players have sufficient liquidity to finance their downsizing without relying on public aid," said UBS analyst Philippe Houchois in the May 1 report.
The first to jump is widely expected to be either GM or Peugeot, which announced a manufacturing alliance in February.
GM lost $747 million on its European operations last year, and has lost money in Europe for 12 straight years. Its Vauxhall factory at Ellesmere Port in north-west England has long been threatened with closure, prompting fierce lobbying by UK business secretary Vince Cable.
Germany's Frankfurter Allgemeine Zeitung reported recently that GM was looking to shift production of the Astra from Ruesselsheim to Ellesmere - a move that would keep the factory open and be a major coup for the UK.
GM's Opel plant in Bochum, Germany, though, remains a candidate for closure, although the company has promised unions it won't close any Opel plants until after 2014.
Meantime the plant in Aulnay, north of Paris, where Peugeot makes its small Citroen C3 model is also vulnerable. An internal company document leaked last June outlined plans to close Aulnay, while cautioning any announcement would have to wait until after the election. It also expressed doubts over the viability of the company's Madrid plant. Peugeot is currently seeking tenants for 17,000 square meters of the Aulnay site in addition to the 23,000 square meters of the factory it has already leased out.
While he has denied that any final decision has been taken, Peugeot Chief Executive Philippe Varin has acknowledged that Aulnay's future is uncertain beyond 2014.
France's President-elect Francois Hollande may have something to say about that, of course. And European carmakers have promised to retrench before, only to carry on as usual. But politicians and car bosses know that they have to act at some point, before a problem of job losses becomes one of bankruptcies.
The consequence of doing nothing "is that European players are weakening little by little," Carlos Ghosn, boss of French carmaker Renault, said at the New York car show last month.
(Additional reporting by Laurence Frost, Charlie Dunmore, Andreas Cremer, Gilles Guillaume, Rhys Jones, Christiaan Hetzner and Edward Taylor; Editing by Sophie Walker)
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