Dimming hope for European auto giants

The industry seeks help, but analysts wonder if falling demand can be reversed before makers resort to deep job cuts.

Early this year, Skoda Auto told the 22,000 employees in its flagship production factory here that they'd have to begin working Saturdays if the company was to meet the seemingly boundless demand for its vehicles in Western Europe and Asia.

But the global financial crisis has since dealt a turnaround. Now, the company is preparing to send its entire workforce home for a week next month for a temporary halt in production. December will be the third straight month of forced vacations – a downtime that translates to 31,000 fewer Skoda cars rolling off assembly lines and significantly less pay for employees.

"It's not easy to explain to workers why we have to do this," says Jaroslav Cerny, of Skoda. "Now, we have to say not only can't you work on Saturdays, but now you can't work on weekdays, either."

Like their counterparts in North America, Europe's carmakers are battling a slumping economy and plunges in consumer demand. To combat that, the European Union this week is expected to unveil a stimulus package for struggling industries, including an anticipated $50 billion for the automotive sector in the form of credit from the European Investment Bank.

Fears are mounting that European carmakers will follow the lead of General Motors, which last Friday pledged to cut production at five North American plants, among other cost-saving measures, as it tries to convince a skeptical Congress to agree to a $25 billion bailout.

Last week, Opel, Germany's third-largest car producer and a GM subsidiary, became the first European carmaker to seek government help. Its executives met with Chancellor Angela Merkel to discuss a $2.5 billion loan guarantee.

Analysts, including Jan Hagen, with the European School for Management and Technology in Berlin, say efforts to maintain car production through direct injections of cash into Europe's car industry does little to address a significant issue: tumbling consumer demand.

"People are afraid of making big personal investments like on a car," Mr. Hagen says.

Demand for cars dropped nearly 15 percent last month across Western Europe. Carmakers have responded by making cuts.

German giant Daimler will halt all work for one month starting Dec. 11. BMW closed its plant in Leipzig, Germany, for nearly a week this month. France's Peugeot-Citroën, the second-largest carmaker in Europe, plans to reduce production some 30 percent and lay off 3,500 workers. Renault, another French carmaker, plans to lay off 6,000 worldwide.

Similarly bleak pictures are reported in Italy, Spain, and Britain, but Hagen says that Europe's car industry is not on the same brink of collapse as Detroit's Big Three. Still, governments are considering measures like suspending certain excise duties and new car taxes to keep carmakers afloat.

Europe's carmakers have not been the only ones hit hard. Automotive suppliers have seen orders for seat belts, windows, gearshifts, and other parts dry up this year.

GKN Sinter Metals, for instance, recently put some of its German workforce on four-day workweeks and is expected to reduce salaries by 40 percent. French car-parts maker Faurecia closed a plant in the Czech Republic this year.

"In this crisis, [some suppliers] will go into red numbers, and next year they will have a problem financing those red numbers," says Ferdinand Dudenhoeffer, an industry expert at the University of Gelsenkirchen in Germany. "Any EU bailout should involve some liquidity for suppliers."

The stakes are particularly high in the Czech Republic, which is more dependent than most European countries on its car industry.

Auto production now accounts for 20 percent of the country's gross domestic product – compared with 5 percent across Europe – thanks to companies like Toyota and Hyundai, which have relocated production facilities to the country in recent years.

The Prague-based Czech Automotive Association recently said the country could lose 10,000 jobs in the first half of 2009, with many of the losses coming from supply companies.

"In the Czech Republic, you basically have a single company [Skoda] that can create up to 8 percent of all Czech exports," says Vladimir Pikora, chief economist at Next Finance in Prague. "So, if you have cuts in production, there will be cuts in employment, especially among suppliers."

The prospects of cuts is especially tough news here in Mlada Boleslav, home to one of the continent's most unlikely business success stories. During the bleak days of Czech communism, Skoda was a favorite punch line. (Old joke: How do you double the value of a Skoda? Add gas.) But since becoming a wholly owned subsidiary of Germany's Volkswagen, Skoda has become one of the strongest brands in Europe's automotive industry, with $10.8 billion in annual sales, deliveries to 90 countries, and a production capacity per capita that outpaces most of its rivals.

In 1991, Skoda produced 180,000 cars. Last year, it produced 620,000. One member of every family here is said to work at the company's half-square-mile production plant.

But Mr. Cerny, of Skoda, denies there will be job cuts – for now. Instead, the company will continue to resort to scaled-back production.

"We are telling our workers that we need them, that we will overcome this crisis," he says.