Wafer-thin margins, more demanding customers and increased competition are threatening to drive Europe's carmakers into factory closures and, in some cases, out of business.
Bernd Pischetsrieder, executive chairman of BMW, is in no doubt.
'When the historians look back on the motor industry in 50 years' time,' he says, 'they will say that the mid-1990s was a period of fundamental change.' And Pischetsrieder is in good company. Fellow captains of the industry also believe that, in its centenary year, their business is in the throes of transformation. 'We've entered the biggest buyer's market in history, what you might call the customer revolution,' expands Sir Alex Trotman, chairman of Ford. 'It's not a passing fad or a temporary trend; it's here to stay and it's going to get stronger.'
Both men believe the force driving the radical change in the industry's terms of trade is the consumer or, more specifically, the consumer's economics.
'Over the last five years, in the United States, the lowest 80% of those employed suffered a drop in net income averaging out at 18% in dollar terms,' says Pischetsrieder. 'That has changed the American car market. We haven't had the same thing in continental Europe yet, although to a certain degree it has happened in the British market over the last five years. Japan has also been affected. What we as manufacturers have to understand with such an expensive and yet such a mass product as a motor car is that if you continue as you did in the past, you will fail badly.'
One obvious question mark hangs over the pricing issue since for decades new car prices in Europe have been much higher than in the US. The absence of a genuine single market, the continuation of entrenched distribution systems and the relatively limited competition, helped by import quotas in most major countries, have sustained that regime. But in western Europe this most sacred of the industry's holy cows is now being threatened by the decline of inflation and the widespread uncertainty felt by consumers.
The conventional pricing structure is also being eroded by the upsurge in second-hand and nearly new car sales, and further undermined by the widespread establishment of schemes offering zero or near-zero finance for new car purchases, such as Ford's Half and Half or Vauxhall's 50:50 initiatives. The toughness of the market was highlighted by Ford of Britain's startling decline from a £25 million profit in 1994 to a £213 million loss the following year, a downturn recorded despite a slight increase in headline sales.
Pischetsrieder believes that, while manufacturers will defend list prices to the last gasp, the underlying reality is that prices may actually decline in real, and possibly even in absolute, terms. 'We will fool ourselves if we assume that prices will continue to increase as they have in the past. They won't,' he says. 'The average car sold in the market will be at a lower price than it was in the past. The number of months' work that it takes the average employee to pay for his or her new car will be reduced in the future. There is no doubt about it.'
Yet at the same time, customers who are keen to pay less are demanding greater choice, requiring a vehicle that meets their individual specifications and aspirations.
Just as sales margins are being squeezed, manufacturers are having to accelerate new model development and increase both the specification and the number of variants of each model.
These twin conflicting elements alone would be enough to make most companies buckle. But established vehicle makers, particularly in western Europe, face an additional factor which is adding to the pressure on their profitability: the expansion of Asian manufacturers hungry for a chunk of the European market. Under a deal agreed between the EU and Japan, the EU market is due to be opened to full competition less than three years from now, on 1 January 1999.
By then, reckons Professor Garel Rhys, director of the Centre for Automotive Industry Research at Cardiff Business School, Japanese out-put from transplants in Britain (Nissan, Toyota, Honda and Isuzu) will be at the level of 750,000 vehicles a year, almost double the 1994 total.
Within a decade, Rhys 70e forecasts, total Japanese output in western Europe could reach two million vehicles. And, of course, the Japanese will continue to export from their home base.
But that is just the Japanese. Behind them, and accelerating fast, are the Koreans, led by Hyundai and Daewoo. Last year Korean sales in Europe totalled only 180,000 cars, of which 152,000 were made by the two leaders, but both manufacturers, together with Kia and Samsung, have ambitious expansion plans. Daewoo, which has invested heavily in east European factories and UK design consultancies, is expected to build a car factory in Britain.
So, before the end of the century, is Hyundai. Other manufacturers, such as Malaysia's Proton, are also advancing into Europe, so far through export only.
Traffic is not just from the east, however. US and Japanese manufacturers are also increasing imports made in America. Chrysler in particular, which retreated from carmaking in Europe when it sold Chrysler UK to Peugeot in 1978, is now increasing its sales presence. Its Jeep and Jeep Grand Cherokee, currently made at a joint venture plant in Austria, are selling well in the fast-growing four-wheel drive market. More significantly, the company is now launching its Neon medium-sized saloon in the British market.
Neon, which went on sale in mainland Europe last year, will highlight the price divide between the US and Britain. It 'will be a Mondeo-sized car at near-Escort prices', says one analyst. Chrysler is starting from a small base (it sold only 17,000 vehicles in Europe last year, including just under 8,000 Neons) but it aims to grow at 20% a year to become a medium-sized manufacturer here.
Now some Europeans themselves are planning to import from lower-cost production centres, both in eastern Europe and offshore. Next year, Volkswagen, for example, will start producing its new Beetle in Mexico, with most output going either to the US or to Europe. And Europeans are building up production overseas of 72e vehicles previously made on the continent for export. In Latin America, for instance, Fiat is assembling the Tipo, and Peugeot the 309. DRI, the industry research organisation, estimates that this export substitution could cut sales from Europe by 150,000 vehicles this year alone.
Adam Collins, industry analyst at Merrill Lynch in London, also forecasts lower European exports to Japan and North America as local production increases; he also predicts some destocking caused by unexpectedly sluggish markets at the turn of this year, and a rise in Japanese and Korean imports into Europe. Although Collins expects European sales to rise 4% this year, he thinks indigenous manufacturers will see negligible sales growth of 2%.
The effect will be to intensify the biggest headache for the Europeans: overcapacity. Trotman explains that, 'Today, there are about 50 car brand names available for sale in Europe, offering around 300 different base models and virtually thousands of derivatives. Yet at the Geneva Motor Show this year, over 30 new models or updates were introduced. The market is saturated with a production capacity of around 20 million vehicles and total sales of just over 14 million.' (Britain accounts for 2 million of these.)
With sales likely to increase only slowly over the next few years, the cost of making those sales rising sharply, indigenous producers improving their efficiency and newcomers driving into the market, the overcapacity problem can only get worse.
It is putting the vehicle makers on collision course with basic economics.
Too many cars chasing too few customers at inadequate margins spells only one word: pile-up.
The crunch, believes Colin Whitbread, European automotive analyst at SBC Warburg, will come in around 18 months' time. 'By then, you will have seen reasonable market improvement in volumes, but no sign of a recovery in margins,' he claims. 'We are heading for a serious price war. What's going on at the moment is minor 75e skirmishing.' Whitbread forecasts that European carmakers will have to bite the bullet and slash capacity, just as the Americans did in the late '80s when confronted with rampant Japanese competition. European consolidation, he believes, will be in two phases. 'Initially, they (companies) will look to put their own house in order individually, trying to cut fixed costs by taking factories out.' The second phase will consist of corporate mergers and alliances.
Factory closures on any sort of scale will be a huge shock to the European system. Isolated shutdowns excepted, the last company to implement widespread streamlining was British Leyland 17 years ago under Sir Michael Edwardes. Even progressive thinkers such as Paolo Canteralla, chief executive of Fiat, still talk of plants being mothballed rather than shut. And companies including Fiat and Volkswagen are still opening new factories, rather than closing old ones.
Manufacturers generally are attempting to cut costs while stopping short of scrapping factories or even of losing many jobs. One way is to squeeze the prices charged by component suppliers, an approach pioneered at General Motors in America by Jose Ignacio Lopez de Arriotura, who then, in controversial circumstances that are still under judicial investigation, joined Volkswagen.
VW's chairman Ferdinand Piech has also preached the gospel of cost-cutting, and aims to slash the number of vehicle platforms in the group by 75% to no more than four.
Despite its size - it is the only European volume carmaker to be truly active on a global scale - VW is as vulnerable as the rest to the corporate cull that is predicted by the likes of Trotman. Ford 2000, Trotman's own audacious reformation designed to liberate resources to satisfy the customer demands of the next century, is aimed at ensuring that his company emerges as a winner, not a victim, of the impending shake-out. 'I keep a collection of old bonnet ornaments from defunct auto companies in my office,' he says. 'They serve as a reminder that the world doesn't owe anyone a living, and doesn't owe any company its business. The bottom line of the customer revolution will be intense competition. Failure to attract enough customers will mean that some name-plates probably aren't going to be around in 10 years. There will be more and more joint ventures and partnerships.'
So far, apart from the takeovers of Skoda by VW and of Rover by BMW, the only recent attempt at a full-scale merger was the Volvo-Renault alliance, which collapsed comprehensively. But within the next decade, the familiar map of the European car industry seems certain to be redrawn. The economics of ferocious competition will see to that. One senior car industry executive, who has extensive international experience, comments that, 'Europe will be the battleground in the late '90s, just as the US was in the '80s. The sad thing is that so many people in Europe will not learn from what happened in America.' l
Andrew Lorenz is business editor of the Sunday Times
The Fleet Sector
Carmakers nudge into the established leasing companies' lane
A new car hardly comes top of an individual's shopping list when recession or low consumer confidence strike. Such bleak times - or even just the perception of bleak times - mean that for the last few years the driving force behind car sales in the UK has been the fleet sector.
The sustained growth of fleet business means that this year, the proportion of the UK market taken by fleet car sales may reach an all-time high, possibly as much as 50%.
In 1989, at the height of the Lawson boom, company cars accounted for 35% of sales.
Growth of the fleet car market has attracted many manufacturers into a market they once avoided because of its notoriously low margins. Five years ago, more than 80% of fleet sales were taken by Ford, Vauxhall and Rover. They still lead, but these days at least 10 carmakers are in competition. Meanwhile short-term rental groups such as Avis, which used to have no more than about four suppliers, now have a dozen.
Manufacturers are also moving into the fleet leasing market. Ian Goswell, executive director of Dial, the Barclays Bank subsidiary which is one of Britain's leading vehicle management service groups, says the carmakers pose a 'significant threat' to the established leasing firms.
Potentially the biggest single change in the market in recent years was the government decision, in the 1994 Budget, to eliminate double VAT on contract hire rentals, and to allow lessors to reclaim the full VAT on the capital cost of cars. Goswell, however, says the impact of the change has been limited so far. According to Keith Sangwin, fleet management expert at Dial's sister company Barclays Mercantile, the response to the VAT change depends on the size of the company: 'The larger companies have definitely been switched on by the effects of the changes to benefit leasing and contract hire,' he says. 'But smaller firms are, as yet, not really plugged in.'
Return of the Native
Is Britain back on the map with re-designed Rover and Jaguar?
One clue lies in Rover's new engineering centre in Gaydon, near Banbury. Another - Jaguar's design and engineering centre in Whitley - comes just a few miles up the road. Once regarded as a white elephant, Whitley is now beginning to flourish under the parentage of Ford.
Forget, for just one moment, the popular laments about the British car industry passing into foreign hands, for the latest crop of overseas investors have, it appears, found a way of moving Britain's automotive activities several notches up the value chain.
Gaydon, headed by Nick Stephenson as design and engineering director, will open in the autumn and will unite all Rover's engineering activities in a single, co-ordinated operation. Engineers will work on the new range of cars and four-wheel drive vehicles that will be aimed at making the image of the British marque as distinct and exclusive as that of its owner, BMW. The centre shows how far Rover has come from the days of its involvement with Honda, an arrangement which came to an end after BMW bought the British company for £800 million in 1994. To build Rover's identity, BMW has had to de-couple the product range from the Japanese influence that came to dominate Rover cars during the company's 14-year association with Honda. Although Rover always styled the cars, the cash-constrained company increasingly abandoned fundamental R&D in favour of buying in what it needed from Honda. The effect was to hollow out Rover's engineering capability.
Gaydon has therefore become the symbol as well as the front-line instrument of BMW's drive to re-engineer Rover. 'The motivation behind changing the Rover R&D organisation,' says BMW chairman Bernd Pischetsrieder, 'is a much stronger, independent engineering capacity which will have a home in Gaydon and which will certainly, in terms of knowledge and power, be much stronger when it is in one place.'
Gaydon's role also speaks volumes for both the state of Rover and its place in the expanding BMW empire. In one respect, the centre highlights how Rover is now firmly under BMW's tutelage. For while Rover's engineers may be moving up the value chain, they are still some way from the top. For its part, Jaguar is already well past the naming stage on the latest Whitley-developed product - the XK8 sports car, successor to the XJS but heir to the E-Type - which will be launched in the UK at the beginning of October.
Nick Scheele, Jaguar's chairman, believes the car will sell about 12,000 units in its first full year, more than double the 5,000 average annual sales of the idiosyncratic XJS. Advance demand from both Britain and the US, where the XK8 goes on sale the day after its UK launch, has been strong.
Jaguar sold 38,000 cars last year, helped by the launch of its new XJ6 saloon. But sluggish markets in continental Europe, combined with fragile confidence in Britain and tough competition from BMW's new 728 model, have made the going sticky this year.
The big cat's quantum leap will come in 1998, when it launches its small car, code-named the X200. At Whitley, designers and engineers who have worked with Ford counterparts in America to develop the car have now taken over full responsibility for the product. The car, aimed at a slot between the BMW 5 series and 7 series, will double Jaguar's annual output to about 100,000 vehicles and open the way to a huge increase in productivity.
In the meantime, Scheele says quality and efficiency are continuing to improve. Recognition of Jaguar's progress came in this year's survey by J D Power, the American motor industry research group, of initial customer satisfaction. The survey measures customer attitudes after three months' ownership, and Jaguar came 13th out of 27 marques.
BMW was placed behind Jaguar, but for its chairman and the recently appointed Rover chief executive Walter Hasselkuss, the survey contained a much bigger cause for concern. Land Rover finished bottom, a reflection of quality problems on its Discovery and Range Rover models. This spells danger for BMW, because with British demand for the Discovery now falling - booming US sales of the Discovery are the single largest driving force for the whole Rover group. When Pischetsrieder bought Rover, the bet was that the sales and profits of the Land Rover business would keep flowing long enough for BMW to sort out Rover's chronically loss-making cars side.
Competiton was clearly intensifying in the four-wheel drive sector but Land Rover retained a superb franchise. As it is, BMW is having to pour hundreds of millions of pounds into updating Land Rover's aged production facilities and developing new products that may give Land Rover a fresh spurt.
COMPARISON OF PRICES FOR A BASIC JAGUAR SOVEREIGN 4.0
Local currency Sterling Index (UK =100)
France FF447,300 £55,919 125.9
Germany DM119,900 £50,695 114.2
Italy L111,5000,000 £46,811 105.4
Japan Y9.700,000 £56,917 128.2
Spain Pta9,960,000 £49,996 112.6
UK £44,400 £44,400 100
US $56,300 £36,234 81.6
Sources: Jaguar. Exchange rates: 1 July 1996.