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OM in the News: Overcapacity Hits the European Auto Makers

June 23, 2012

About 3 years behind the crash of the US auto industry, Europe is now facing the same dramatic issue of too much manufacturing capacity, our topic in Supplement 7. Europe’s auto industry has suffered declining passenger-car sales in each year since 2008, and is on track to absorb an at least 7% drop this year. All told, auto makers there are selling about 20% fewer cars than they were in 2007, leaving many with mounting losses and far more plants, workers and production equipment than they can keep busy. “Europe is a mess,” says a leading industry consultant in yesterday’s Wall Street Journal (June 22, 2012)

please click on the graphic to enlarge

Powerful labor unions and most European governments have been fighting efforts to close plants because of the jobs that are lost. As a result, auto makers keep their factories open but cut their hours and assembly-line speeds to reduce production. About 30 of the 98 European auto-assembly plants  are operating below 70% of their capacity, levels that typically cause plants to run up significant losses.

Hyundai, an exception,  is gaining share because of its low-cost production in the Czech Republic. Manufacturing labor costs in the Czech Republic, at an average €9.90 ($12.50) an hour, are below Italy’s €26.10, €35.60 in France and €34.30 in Germany.  Hyundai’s CEO for  Europe says some of his regional rivals are struggling because they either lack the scale or “make cars in countries with expensive and inflexible labor conditions.” Renault, Peugeot and Fiat each have a glut of factory capacity. When the Wall Street financial crisis hit in 2008, the two French auto makers took government aid packages that required them to keep plants in France open. Now they have some of the least used plants in Europe, at a difficult time.  Renault’s small-car plant in Valladolid, Spain, is operating at just 38% of its capacity.

Discussion questions:

1. At what capacity should an auto plant operate? What are typical US rates?

2. Why is capacity such an important OM topic?

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