As Car Business in U.S. Brightens, in Europe It Gets Uglier

February car sales in the U.S. will be at multimonth highs and the annual sales run rate will be 14 million. Chrylser has already announced a 40% improvement. That is still well below the 16 million level of 2005, but American auto manufacturers have made deep enough cuts that the U.S. market will be very profitable. In the meantime, the Europe market worsens — almost by the day. Car companies with large operations in the region will have to do what happened in the U.S. in 2008 — slash costs or suffer losses well into the hundreds of millions of dollars.

Ford’s (NYSE: F) CFO Lewis Booth said the Europe car market would produce 14 million sales this year, which is about the same as the U.S. But factory capacity in the region is still much too high. Booth expects Ford to lose $500 million in Europe this year.

General Motors (NYSE: GM) is about to set a deal under which it will invest in PSA Peugeot Citroen. The U.S. company will have a 7% stake in the French one in exchange for $1 billion. The two firms expect the transaction to result in savings of $2 billion within five years. That is because they will share manufacturing and parts sourcing.

The recession that has spread across Europe will hurt the prospects of local manufacturers such as Mercedes and BMW. The downturn could be deep enough to ruin Volkwagen’s plans to overtake GM and Toyota (NYSE: TM) as the world’s largest car company. The environment may be worst for Opel, GM’s unit, because its factory capacity is much too big and its sales have fallen rapidly.

GM will try to use its Peugeot investment to take costs out of Opel. This would involve using Peugeot facilities in favor of Opel ones. The problem with this is that Opel cuts will be opposed by powerful labor unions and, perhaps, local governments that want to maintain employment in already brutal jobless situations.

European car companies lack the one tool that American car companies had during the recession of 2008 and 2009. GM and Chrysler entered Chapter 11. They were provided capital by the U.S. government. Their bankruptcies aided their abilities to cut workers and plants. Each came out of Chapter 11 much smaller than it went in. The UAW lost a great deal of leverage in the process. Instead of trying to save car company jobs, federal money helped buoy the corporations as they rapidly curtailed their employment bases.

Opel and Peugeot will not go bankrupt in Europe. Neither is in enough trouble to do so. The same holds true for the other large manufacturers in the region. Each will have to take huge losses, without a great deal of leverage with labor or governments.

Opel, Peugeot and their peers in Europe are in the midst of a long, dark period of losses. They do not have the facility to cut costs rapidly. Without those tools, cost profitability will be impossible. Each might even wish it could take the route of bankruptcy that GM and Chrysler did. At least both of those companies were able to wipe their cost and debt slates clean.

Douglas A. McIntyre