Two swallows do not make a car industry summer

Renault and Fiat shares have been enjoying a scintillating run. They have outperformed not only most other industrial companies last month but also their own car sector, whose shares rose an average 38 per cent in March. The value of Renault shares jumped a spectacular 102 per cent last month, while Fiat’s shares rose almost 90 per cent during the same period. On Thursday, Fiat shares gained a stonking 27 per cent on the day.

But two swallows do not make a summer just as two robins do not make a spring. The car sector has of course suffered more than any other industry in the global financial and economic slump. Many governments have rushed to the support of their domestic car sectors for obvious reasons. After all, in countries such as France, Germany and Italy the car industry is still one of the largest industrial employers.

The various financial incentives provided by some governments have helped to stabilise – temporarily at least – the situation. The French, Italian and especially the German market all recovered last month thanks to the government incentives to scrap old cars for new ones. Countries that did not introduce such programmes continued to suffer, which was, for example, the case of Spain and the UK.

There is also a general but probably flawed perception that the car industry has finally reached the bottom of its current dramatic cycle. Sanford Bernstein analyst Max Warburton says that in 1993 car sales fell 17 per cent but shares in the sector rose 50 per cent and gained another 20 per cent in the first half of 1994 when car sales finally stabilised. The pattern thus seems to be repeated this time round.

He also notes that volume manufacturers outperformed the premium car makers on the way out of the recession. Again this seems to be the case and perhaps more so given the demand for fuel efficient cars.

Mr Warburton in a separate report makes another good point. If the new US administration is seriously considering dropping GM and other US manufacturers from state financial life support, this would be a further boost to European and Japanese competitors. What is good for GM is good for America is the old saying. Mr Warburton now suggests that what is bad for GM is good for Europe and Japan by providing them with market share opportunities in the US and Europe (that is, presumably, if Opel is taken out of the market). He calculates that the demise of GM could be worth €18bn of additional earnings before interest and tax to other car makers.

Yet for all these sound arguments, you probably still need to be a speculator to leap in and buy car shares – the overall situation remains pretty dire in the car industry.

As Fiat’s Sergio Marchionne recently told his shareholders at Fiat’s annual meeting, there is still far too much production capacity – 94m cars – in the world car sector. That is 30m cars too many and unless radical restructuring is undertaken, plant utilisation will simply continue to fall from an average 75 per cent last year to 65 per cent this year.

Governments and car industry owners will clearly have to accept a sweeping rationalisation of the sector to take out capacity with all its unpleasant and politically difficult social implications. Governments will also have to co-ordinate their efforts to support and restructure the industry to avoid distortions of competition – something that now risks intensifying not only with the unilateral support plans of various states but also in their partisan approach to climate change regulations.

The situation is far from rosy, but that is not stopping speculators making a lot of money. The irony is that for all the fuss about excessive executive pay, hardly anyone has raised an eyebrow over the fact that public funds being used to prop up structurally unsustainable car industries are indirectly helping to enrich market speculators.

Best of enemies

One of the big ambitions of President Nicolas Sarkozy is to reinforce France’s leading role in the nuclear sector. In particular, he is keen to consolidate his country’s energy sector around a few industrial champions with the global scale to take advantage of the revival of interest in nuclear power.

The problem is that these new champions have shown little appetite to do business together. Areva has been fiercely and so
far successfully resisting efforts to combine it with Alstom. As for EDF, it would much rather co-operate with Italy’s Enel and German utilities Eon and RWE, all interested in a stake in a future new generation French nuclear plant, than with domestic rival GDF-Suez.

One can only conclude that the energy sector is no exception to the old French custom of preferring to sleep with a foreign enemy than entertaining a potentially more dangerous liaison with a domestic rival.

european.view@ft.com