the impact of trade liberalisation on the eu automotive ......industry in dire straits. car makers...

The impact of trade

liberalisation on the

EU automotive

industry: trends and

prospects

European Commission

DG TRADE

11 July 2014

The impact of trade liberalisation on the EU

automotive industry: trends and prospects

Authors:

Martin H. Thelle

Anders Oskar Kjøller-Hansen

Tine Jeppesen

Jens Sand Kirk

Sigurd Næss-Schmidt

Frank Verboven (University Leuven)

Jo van Biesebroeck (University Leuven)

FINAL REPORT

This study is produced by Copenhagen Economics on the request of the European Commission, DG Trade, under framework contract (TRADE/07/A2). The opinions expressed are those of the Contractor only and do not repre-sent the Commission’s official position



Table of contents

Summary 3

1 The automotive industry in the EU 13

1.1 Car makers in Europe are in a difficult situation 13

1.2 Production in Europe 15

1.3 The outlook: Business as usual will be poor business 21

1.4 Employment in vehicle manufacturing in Europe 25

1.5 Summary 28

2 How cars are traded 30

2.1 Current trade situation 30

2.2 Little impact from trade liberalisation to date 33

2.3 Cars sold in Europe are mostly made in Europe 37

2.4 Local vs imports for EU car makers abroad 51

2.5 Summary 66

3 Trade barriers for cars and parts 68

3.1 Tariffs on cars, parts and components 68

3.2 Processing trade 70

3.3 Non-tariff barriers (NTBs) 71

3.4 Quantifying NTBs in terms of trade costs 80

4 FTAs and trade liberalisation for cars 90

4.1 Data 90

4.2 2011 baseline 91

4.3 Counterfactual analysis 93

4.4 Results 98



5 Impact on parts, components and related industries 110

5.1 FTAs and trade liberalisation for parts and components 110

5.2 Methodology 111

5.3 Baseline data 115

5.4 Results for parts and components 120

5.5 Impact on related industries in the EU 123

Conclusions 127

References 128

Appendix A 131

Appendix B 133

Appendix C 136

Appendix D 146

Appendix E 148

Appendix F 158

Appendix G 167



3

Summary

This report, produced at the request of the European Commission (DG Trade), quantifies

the individual and cumulative impacts for the automotive industry in the EU of a series of

FTAs with EU trade partners.

Having performed detailed analyses of 19 FTAs with existing and potential EU FTA part-

ners, we come to the overall conclusion that free trade also is a win-win situation for the

automotive industry in Europe and its partners. The automotive industry has a large eco-

nomic footprint in the EU today, and that footprint is likely to grow even larger, if FTAs

with the 19 FTAs partners are fully implemented. Our analysis covers cars, light vehicles

and parts and components.

In a cumulative scenario with both tariff and non-tariff barriers reduced, we find large

positive effects on the EU automotive sector. Completing and fully implementing all 19

possible FTAs would increase in EU car production by 4 per cent, or almost 580,000

more cars, even after taking into account the increased competition in the home market.

Both in relative and absolute terms, the changes in EU exports are expected to exceed the

change in imports, and free trade is more likely to be an opportunity than a threat to the

EU’s automotive industry.

That being said, Europe’s automotive industry is in a difficult situation. Consequently,

due care is needed in sequencing and refining the agreements to ensure a successful tran-

sition to more open trade.

Seen in a broader perspective, the EU automotive industry should find good opportunities

from the full menu of FTAs that is on the table, and should not be threatened by fears and

lose their appetite for more open trade.

The present study is based on assumptions used in previous studies conducted as part of

impact assessments of the FTAs . For most negotiations, the assumptions used in the

present study are the conservative/central scenarios used in the previous studies which

often correspond to the least ambitious (i.e. in case of EU-Japan FTA). The only exception

is the EU-Korea FTA, which is the only new generation FTA that is already in force, and

for which the assumptions are based on the study of consequences which analysed the

outcome of the negotiations. These assumptions are far more ambitious than those used

for the other FTAs as in this particular case empirical evidence existed that supported the

use of a more ambitious scenario (i.e. the agreement and provisions to remove NTBs are

already in place).

The current situation: Car makers in Europe are in a difficult

situation Europe’s car makers are in a difficult situation. In 2007, the European automotive indus-

try recorded profits of €15 billion. By 2012, that profit had become a loss of €1 billion.

There are two main reasons. First, Europeans bought fewer new cars. New registrations in



4

Europe dropped by more than four million units since 2007 and car sales are at levels not

seen in 20 years. Second, Europe’s well-developed automotive industry has not fully cap-

tured the growth in car ownership outside Europe, and the EU industry suffers from over-

capacity and fierce competition, keeping prices and profits down. As a result, EU sales of

passenger cars relative to global sales have decreased from 34 per cent before the crisis to

20 per cent today.

The outlook: Business as usual will be poor business Towards 2020, both production and sales of European and foreign car makers in the EU

is expected to increase, and so is net export. But the expected improvements are unlikely

to be sufficient to return the industry to healthy levels of capacity utilisation, and conse-

quently, the outlook is poor. In a business-as-usual development (i.e. a “no policy” sce-

nario), Europe’s role as an automotive production hub will decline. While the European

share of total world production is expected to decrease from 19 per cent in 2012 to 17 per

cent in 2020, the share of total production taking place in China is expected to increase

from 22 per cent in 2012 to 28 per cent in 2020.

Employment in vehicle manufacturing in Europe is at the same level as before the crisis,

but it can be expected to decrease given the current outlook. We estimate that returning

capacity utilisation to a healthy level will require increased production of approximately

2.5m vehicles.

The Opportunity: Growth in demand outside Europe The rather bleak outlook for EU’s automotive production and employment will be some-

what counter-balanced by the opportunities presented by the global increase in demand

for new cars, especially in emerging markets. But for that opportunity to generate jobs in

Europe, exports of cars manufactured in Europe would need to increase.

With weak demand at home, and with current market shares for European car makers in

foreign markets being relatively low, growth in markets outside Europe is needed to rein-

state the profitability of European car manufacturing. To assess these possibilities, we

have assessed the increasingly complex value chains of the modern car industry and

looked at whether FTAs with main partners will present an opportunity or a threat to the

European automotive industry.

A solid and growing trade surplus The starting point is not so bad. The EU has a solid trade surplus in automobile trade with

the rest of the world, and this surplus has been growing in recent years. This is true for

both cars and parts and components. And the EU has a trade surplus with most partners,

both in cars and in parts with the exception of Japan and South Korea. The EU has a sur-

plus with Japan when measuring the value of cars, but because of a significant importa-

tion of car parts and components, which in part result from the large production of Japa-

nese car manufacturers in Europe, the EU has a trade deficit with Japan when looking at

the combined trade in cars and parts and components. While overall EU exports have



5

increased, home market demand has decreased even more, leaving the European auto

industry in dire straits.

Car makers in Europe sell in Europe Manufacturers in the EU, whether of a European or foreign origin, are very dependent on

the European market for selling their vehicles. Around 10 million of the 16 million EU-

produced vehicles in 2012 were destined for the home market, corresponding to 65 per

cent of production.

Cars sold in Europe are mostly made in Europe A similar picture appears when looking at the EU market from a sales perspective. For the

past ten years (2003-2012) around 86 per cent of the cars sold in the EU were produced

within the EU and only 14 per cent of the units sold were imported.

Little impact from trade liberalisation to date Did past trade liberalisation cause the problems we are facing? No, this is unlikely. Be-

sides the free trade agreement with South Korea, no trade agreements between the EU

and a main car producing country has been implemented. The Korea FTAs has given rise

to many concerns, but it is still too early to assess the actual impact of the agreement.

Taking a preliminary look at trade with Korea between the last full year without the

agreement (2010) and the first full year with the agreement (2012), we find that imports

of Hyundai’s and Kia’s from South Korea have increased by 65,000 units. At the same

time, imports from India to Europe of the same two brands have dropped by 40,000

units. Deliveries to the EU market from the Korean manufacturer’s plants in Turkey in-

creased by around 30,000 units. But still, a much bigger increase was seen in output from

the two plants located within the EU, which supplied 100,000 more Hyundai’s and Kia’s

to the European market in 2012 than in 2010 (up from 300,000 to 400,000 units). It has

also to be borne in mind that the comparison year – 2010 – was a year of lower vehicle

exports to Korea.

So in absolute terms it is difficult to see that the free trade agreement with Korea is having

dramatic negative effects in Europe as of 2012. Three years after the provisional applica-

tion of the agreement, it is also important to acknowledge that the market share of EU

cars in the Korean market has also increased reaching 10 per cent in 2013.

With a high dependency on the home market and with only around 14 per cent of sales

being imported, it seems clear that the root causes of the bleak financial situation for Eu-

ropean car makers are to be found in the domestic market rather than abroad.

More trade liberalisation – a threat or an opportunity? The EU automotive industry has many strengths in areas such as skills, leadership, tech-

nology and brands. The industry has also had some success in gaining market shares in

both mature and emerging markets outside the EU, and many European car makers have



6

invested substantially in overseas markets. EU manufactures have benefitted from these

opportunities and the growing and positive trade surplus in passenger cars is demonstrat-

ing these achievements.

Trade barriers (tariffs and non-tariff barriers) are depressing these opportunities for the

EU automotive industry and making it more difficult to take part in the growth in foreign

markets. Similarly, the EU’s own tariffs and non-tariff barriers make it more expensive

for foreign competitors to sell cars produced outside the EU on the European market.

Given the current challenges with slack domestic demand, the EU automotive industry

has voiced concerns about the potential negative impacts of some of the new bilateral free

trade agreements (FTAs) that the EU is signing or is the process of negotiating.

Assessing the impact of 18 FTAs beyond Korea In addition to assessing the likely impacts of the agreement with Korea, this study pro-

vides a detailed analysis of the most likely impacts on the EU automotive industry from

the assumed full implementation of the potential FTAs with Canada, the US, Central

America, Colombia/Peru, MERCOSUR, Ukraine, India, Singapore, Thailand, Malaysia,

Indonesia, Vietnam, Japan and the eventual re-negotiations of the existing FTAs with

Morocco, Tunisia, Egypt, Jordan and Mexico. An investment agreement with China is also

discussed. The potential FTA partners represent 58 per cent of total EU export of cars in

2012 and 75 per cent of total car import measured in value.

Building on the method developed in Van Biesebroeck, Gao and Verboven (2012), we

have performed comprehensive econometric analyses using detailed data the individual

car model-level (e.g. Fiat Punto, Ford Fiesta or Toyota Yaris) to quantify the most likely

consumer and producer responses when prices of imported cars drop as a result of the

FTAs. The analysis takes the actual location of the production of individual models into

account in the most recent available year (but assumes no changes), and thereby our

analysis captures the fact that for example Korean car makers produce certain models

within Europe, others at home in South Korea and others models again at locations in

India and Turkey and supply the European market from there. The model takes a number

of other relevant aspects of choice of new cars into account (besides the price), and there-

by we capture the observed substitutability between the various models available to con-

sumers not only on the European market, but also in the markets of the FTA partners.

The scenarios analysed comprise both tariff elimination and the reduction of so-called

non-tariff barriers. The degree of trade protection and the potential for reducing the im-

pact of trade barriers in the automotive sector varies from country to country, but is con-

sistently higher for final cars than for parts and components. The scenarios analysed

comprise reductions in landed marginal costs of final cars of up to 12 per cent in the EU,

and reductions ranging between 5 per cent and up to 35 per cent in the partner countries.



7

Main results: Many opportunities, few threats We analyse the impacts of the FTAs both individually and the cumulative effects of vari-

ous combinations of FTAs, including the full set of 19 FTAs. We assess two scenarios. One

where only tariffs are removed, and another where both tariffs and non-tariff barriers are

reduced.

In the “tariff only” scenario for Korea, production in the EU will increase or

remain almost unchanged. EU import is predicted to increase by around 25,000 vehi-

cles, when taking into account that increased exports from South Korea will be partly

offset by decreasing exports from other countries. EU export to Korea will increase by

slightly more (27,000 units), and overall demand will increase, resulting in a small

positive impact on car production in the EU.

In the “tariff + NTB” scenario for Korea alone, the impacts are more pro-

nounced with respect to EU export while identical to the results in the “tariff only”

scenario with respect to imports from Korea. The result is an increase in EU exports

of 97,000 units compared to the situation without the Korea FTA (or 70,000 more

than in the “tariff only” scenario). As a result, EU car production increases by

more than 80,000 units, when taking into account the increase in import and the

overall demand effect.

In the “tariff only” scenario for the cumulative effects of all other FTAs in

addition to the Korea agreement we see bigger impacts. More trade is set free and im-

plementing several FTAs simultaneously will cause firms that benefit from an FTA to

respond more aggressively to price reductions by their competitors from other FTA

countries. EU exports will increase by up to 396.000 units if tariffs with all partners

are removed, while imports from all non-EU countries will increase by 105.000 units.

Taking the increase in demand and displacement of imports from non-FTA partners

into account, we estimate an increase in EU car production of 340.000 units.

A large share of the positive impact stems from agreements with Mercosur and other

Asian countries, which are significant export markets, but insignificant sources of im-

ports into the EU.

In the “tariff + NTB” scenario for the cumulative effects of all other FTAs in

addition to the Korea agreement, impacts are naturally even more pronounced. The

expected cumulative impact of all possible FTAs, is an increase in EU production

of almost 570,000 cars or 4 per cent of current levels. As in the case of each indi-

vidual FTA, both relative and absolute changes in EU exports are expected to exceed

the change in imports.

More detailed results are presented in Chapter 4 and results are compared with previous

studies.

Positive impact on parts, components and related industries Finally, we have assessed the impact of the FTAs, not only for car manufacturing, but also

for the EU production of parts and components and the industries related to the automo-

tive sector.



8

We find that the agreement with Korea in the “tariff + NTB” scenario will lead to an in-

crease in production of parts and components in the EU of around 0.4 per cent. Looking

at the cumulative impact of all the other FTAs (assuming the EU-Korea FTA is already

fully implemented) we estimate an increase of EU production of parts and components of

2.9 per cent compared to baseline. This result is from the comprehensive scenario of “tar-

iffs + NTBs” and adding the effects of all 18 FTAs to the effect of Korea agreement. In the

“tariff only” scenario, the cumulative impact of all the FTAs is naturally smaller than in

the case where NTBs are also reduced. According to our simulations, we estimate an im-

pact on the production of parts and components of around 1.8 per cent.

Large economic footprint today - and more FTAs will leave an even bigger footprint Looking at the current economic footprint, we find that the production of cars, parts,

components and related industries contributes to the EU economy with a production

value of €772 billion. Compared to the contribution of total EU manufacturing, the auto-

motive industry make up no less than 12 per cent.

We find that the full implementation of all FTAs analysed in this will increase the produc-

tion value in the automotive industry by more than €20 billion (on top of the impact from

the Korea FTA) that the cumulative impact of all the FTAs, assuming the agreement with

Korea is already fully implemented, will correspond to over 100,000 jobs in the automo-

tive industry and related industries. Of this impact, the tariff reduction alone is estimate

to yield an increase in production of more than €15 billion, and corresponding to around

75,000 jobs.

Structure of the report

The report is structured as follows. In the following pages, we provide a short introduc-

tion. In Chapter 1 we assess the current situation for the EU automotive industry and

present an outlook for 2020 on key parameters such as sales and production. In Chapter

2 we present the current situation when it comes to trade and the location of production

of passenger cars and its supply chain. In Chapter 3, we present the current trade barriers

in terms of both tariffs and non-tariff barriers and presents the expectations of the degree

of reduction of these barriers resulting from the FTAs once they are fully implemented

and phased-in. In Chapter 4, we present our simulations from the econometric model of

the impacts using detailed data at the car model level, and present our assessments of the

possible impacts of the scenarios presented in Chapter 3. Finally, Chapter 5 is devoted to

the analysis of the supplier industries in Europe.



9

Introduction

Background

The automotive industry represents a significant share of output and employment in the

European Union. The continued process of global economic integration implies growing

incomes in emerging markets both nearby Europe and further afield, and at the same

time new car manufactures have entered the stage and compete in the global markets. In

addition, the supply chains have become even more integrated and growing global in

scale.

Recently, domestic demand in Europe for new cars and other motor vehicles has dropped

as a result of the global financial and economic crisis starting from 2008/2009, and trade

volumes have dropped in response to the drop in demand. At the same time, demand for

new cars has been less affected in emerging markets during the crisis, and consumption

and trade patterns are shifting towards fast growing markets outside Europe, and conse-

quently access to these overseas markets is becoming ever more important both for trade

flows of final goods and for the organisation of the supply chain.

This presents the European automotive industry with new opportunities and new chal-

lenges in the home market as well as abroad.

While the EU automotive industry has many strengths in areas such as skills, leadership,

technology and brands, there is also an overcapacity compared to domestic consumption

and current export levels, and the industry is struggling to maintain production levels in

the face of the declining sales in Europe resulting from the economic downturn.

At the same time, the EU automotive industry has also been successful in gaining market

shares in both mature and emerging markets outside the EU, and many European car

makers have invested substantially in overseas markets. EU manufactures have benefitted

from these opportunities and the growing and positive trade surplus in passenger cars is

demonstrating these achievements.

Trade barriers (tariffs and non-tariff barriers) are depressing these opportunities for the

EU automotive industry and making it more difficult to access and take part in the growth

in foreign markets. Similarly, the EU’s own tariffs and non-tariff barriers are discouraging

foreign competitors from further success in the European market.

Given the current challenges with slack domestic demand, the EU automotive industry

has voiced concerns about the potential negative impacts of the new bilateral free trade

agreements (FTAs) that the EU is signing or is the process of negotiating.

Objective and scope of the study

The objective of the study is to quantify individual and cumulative impacts for the auto-

motive industry in the EU of a series of FTAs with EU trade partners.



10

The study covers manufacturing of passenger cars and light commercial vehicles, its parts

and components suppliers as well as the related industries. The study analyses the impli-

cations for the automotive industry in the EU from the assumed full implementation of

the FTAs listed below.

EU-South Korea

EU-Central America

EU-Colombia/Peru

EU-Singapore

EU-Canada

EU-Ukraine

EU-India

EU-Japan

EU-MERCOSUR

EU-Morocco

EU-Malaysia

EU-Vietnam

EU-US

EU-Thailand

EU-Indonesia

EU-Tunisia

EU-Jordan

EU-Egypt

EU-Mexico

The study covers both domestic and foreign car manufacturers established in the EU as

well as the opportunities for the EU manufacturers in the partner countries.

Methodology used in the study

The study provides an assessment of the current situation, the trends and outlooks for the

industry and provides a detailed analysis of the possible impacts on the automotive indus-

try of the above FTAs.

The study has two main analytical parts. First we perform a comprehensive econometric

analysis of the most likely consumer and producer responses when prices of imported

cars drop as a result of the FTAs. This provides our assessment of the most likely changes

in demand side substitution for new cars resulting from the FTAs. Second we perform a

follow-on analysis looking at the implications in other parts of the value chain taking into

account the impacts on supplier industries including suppliers of parts and components,

but also the derived demand for steel, aluminium, machinery and engineering as well as

other relevant suppliers. The two analyses are linked together such that the results from

the first analysis feed into the second analysis.

In the first analysis we use detailed data at the individual car model-level (e.g. Fiat Punto,

Ford Fiesta or Toyota Yaris) to analyse the most likely consumer and producer responses

when prices of imported cars drop as a result of the FTAs. We analyse both the individual

FTAs one-by-one and the cumulative impact of the above FTAs and subsets hereof. This

analysis is central as it predicts the most likely responses on the trade and EU production

in new cars, and we perform analyses of two scenarios - one with only tariffs being re-

duced and another where both tariffs and non-tariff barriers are reduced. The analysis

takes the actual location of the production of individual models into account in the most

recent available year, and thereby our analysis captures the fact that for example Korean

car makers produce certain models within Europe, others at home in South Korea and

others models again at locations in India and Turkey and supply the European market

from there. The model takes a number of relevant aspects of choice of new cars into ac-

count besides the price, and thereby we aim at capturing the substitutability between the

various models available to consumers not only on the European market, but also in the

markets of the FTA partners.



11

Box 1 Demand side model for cars The econometric model of the demand side is used to assess the impact of FTAs on do-mestic sales, domestic production, imports and exports for manufacturers of passenger cars. Both the separate and the cumulative (and sequential) impact of such FTAs are calculated. In this part of the study we will follow the methodology used by Van Biesebroeck, Gao and Verboven (2012) in their study on the impact of FTAs on the Canadian auto industry. The methodology includes the following steps: 1. Estimating an aggregate demand system, using a nested logit model, which is a variant

of the random coefficients model as done by Berry, Levisohn and Pakes (1995), in order to obtain own and cross price elasticities for each model of car sold in the EU.

2. Inferring the marginal costs of each car model using the estimated price elasticities from step 1.

3. Conducting a counterfactual analysis of the impact of a given FTA by calculating the re-duction in the marginal costs of the car models that are directly affected by the tariff or NTB cuts.

4. Hereafter, the new equilibrium price vector in the market is obtained by taking into ac-count that producers of competing brands will also adjust their prices.

5. Finally the new market share of each car model is calculated. As such, it is possible to calculate the overall impact of a given FTA on consumer surplus and average prices, as well as on total sales, imports, exports and production.

These steps allow us to estimate the most likely impact of a given FTA on total import

volumes by aggregating the calculated sales quantities for all models by their import

status. We further examine the resulting consumer responses within the EU, resulting

from a given FTA building on estimates from our econometric model of how closely dif-

ferent models compete.

Note: The above is a summary of the approach. For more details, we refer to Chapter 4 and the technical

annex.

Source: Copenhagen Economics based on Van Biesebroeck, Gao and Verboven (2012)

In the second analysis we conduct a quantitative analysis of the impact of trade liberalisa-

tion on EU demand, production, imports and exports of car parts and components and

associated/dependent industries.

In this part we analyse the down-stream linkages of the related industries – i.e. the sup-

pliers to the automotive manufacturers based on detailed input-output modelling. This

includes the suppliers of car parts and components, but also the derived demand for steel,

aluminium, machinery and engineering as well as other relevant suppliers. The analysis

covers the impact of trade liberalisation on EU demand, production, imports and exports

for the same FTAs as above. Both the individual and cumulative impacts are assessed, and

again we apply the same two scenarios of “tariff only” and “tariffs + NTBs”.

For this part, we rely on a modelling framework based on detailed input-output modeling

and industry specific data. This provides a more suitable analytical tool than traditional

CGE-models. In our view this will better capture the nature of the value chains, and we

will be able to assess impacts through the value chain for example through lower input

prices (e.g. components) as a result of trade liberalisation.



12

Together the two analyses provide a comprehensive and detailed analysis, yet still a par-

tial equilibrium analysis of the automotive industry and related industries. The approach

differs from the traditional general equilibrium studies done previously to assess the im-

pact of FTAs.

The advantage of the approach chosen in this study is that we can capture the details of

the automotive industry much better than in a general equilibrium model, since we have

detailed data on individual car models and the location of their production. The downside

from choosing a partial equilibrium approach instead of a general equilibrium approach is

mainly that we do not assess the interaction with other sectors.

The omission of general equilibrium effects means that we do not assess impacts for other

goods and services outside the automotive sector and related industries. Naturally FTAs

will also cover other industries and services and the changes for other sectors are not ana-

lysed here. FTAs will have impacts on production in other sectors which in turn will lead

to changes in the demand for inputs such as labour, capital, energy and materials. The

resulting changes for input costs are well captured in the general equilibrium models, but

not included in the partial analysis. In addition, FTAs will generally increase real income,

which is also captured in a general equilibrium model, but omitted in partial analyses.

Finally, we have not quantified the eventual long-term impact in terms of the changes in

location of production of cars as a result of FTAs. The reason is clearly, that we have no

basis for forecasting the eventual changes in the location of production for global automo-

tive producers. Furthermore, our approach requires detailed market data on prices and

sales at the individual car model level as well as detailed trade flow data. These are not

projected to a future years, and consequently it is not possible to predict such changes

with a sufficient degree of accuracy. This needs to be borne in mind when interpreting

the results, and the eventual changes in location of production needs to be considered

separately.



13

Chapter 1

1 The automotive industry in the EU

In this chapter we assess the current situation for the European car industry, the struc-

ture of car production in Europe and the outlook for car manufacturing in Europe. We

distinguish between car manufacturing in Europe and European car manufacturers. The

former denotes the production of cars in Europe regardless of ownership and origin of the

car maker, while the latter refers to car makers of a European origin.

1.1 Car makers in Europe are in a difficult situation Europe’s car makers are in a difficult situation. In 2007, the European automotive indus-

try recorded profits of €15 billion. By 2012, that profit had become a loss of €1 billion

according to a recent study by McKinsey.1 The study points at two main reasons for the

decline. First, fewer people bought new cars. Across the region, the number of new regis-

trations declined by more than four million units over this period, and car sales today are

at levels last seen in the early 1990s. Second, Europe’s well-developed automotive indus-

try suffers from overcapacity; fierce competition is keeping prices and profits down.

Before the financial crisis, in 2007, total sales of passenger cars and light commercial

vehicles were 17.8 million per year in the EU, while by 2012 this figure had dropped to

13.5 million vehicles.2 A further drop in 2013 is foreseen to around 13.1 million units, cf.

Figure 1.1. In the same period, EU sales of passenger cars relative to global sales have also

decreased from 34 per cent of global sales before the crisis to 20 per cent today. This is

driven both by declining sales in Europe, but also by sales growth in emerging markets.

The development in Europe is in stark contrast with the global development. Globally, the

automotive industry has recovered from the economic crisis. The industry has seen profits

increase from 2007 (€41 billion) to 2012 (€54 billion) according to McKinsey analysis,

which also predicts further growth global profits by another €25 billion reaching €79

billion in 2020.3 But as shown in this chapter, growth and future profits will not be dis-

tributed equally across all geographies or all types of cars. Most of the future growth will

take place outside Europe, and European car makers will therefore be increasingly de-

pendent on access to these growing markets to pursue future growth and profits.

1 McKinsey (2013), “The road to 2020 and beyond: What’s driving the global automotive industry?”, August 2013. 2 This corresponds well with the new registrations of 13.5 million in 2012 reported by ACEA. 3 McKinsey (2013).



14

Figure 1.1 The EU market has been decreasing, and so has the

EU sales relative to global sales

Note: Columns shows sale of passenger cars and light commercial vehicles. The curve and the correspond-

ing right-hand axis shows the EU market sales as share of global sales, but for passenger cars only.

Source: Authors’ calculation on data supplied by IHS Global SA; Copyright © IHS Global SA, 2013. All rights

reserved.

Although car sales in the EU have been declining, sales numbers are not likely to have hit

rock bottom yet. Declining sales are expected for 2013 although the rate of decline is ex-

pected to be less dramatic than in recent years and growth will slowly return in 2014 alt-

hough the pre-crisis level above 17 million is not foreseen to be reached by 2020, cf. Fig-

ure 1.2.

The base forecast4 for passenger cars and light commercial vehicles sales shows a positive

mid-term outlook which is supported by recovery of the global economy, growing re-

placement needs and a comparably broad range of planned new model introductions.

4 The forecasts presented here are from the so-called base forecast. The forecast covers the next 7 years and can be

seen as a “no policy change” scenario not taking new FTAs into account. The forecasts are built on examination of the

automotive industry from a demand perspective using a disciplined forecasting methodology combining analyst

knowledge, macro econometrics, and statistical analysis with segment trends, brand strategies, model lifecycle stag-

es, future model plans, consumer behaviour and production capacity constraints. The forecasts present in this report

are from IHS Automotive Light Vehicle Sales Forecast released for Q1 2013 as supplied by IHS Global SA; Copyright

© IHS Global SA, 2013. All rights reserved.



15

Figure 1.2 From a car sales perspective the negative impact of

the economic crisis is still looming (cars + LCVs)

Note: Includes passenger cars and light commercial vehicles.


reserved.

1.2 Production in Europe In 2012, approximately two thirds of the vehicles sold in Europe were produced by manu-

facturers of European origin (see Box 1.1 for definition). One third of the vehicles sold

were produced by foreign original equipment manufacturers (OEMs). Most of the produc-

tion for the European market of both European (domestic) and foreign car makers takes

place in Europe.

Box 1.1 European and foreign car makers

We distinguish between European and foreign car makers. European car makers are

those of a European origin while foreign car makers are denoting OEMs of a non-

European origin. The distinction is based on the origin of each group.

European car makers include among others Volkswagen (Germany), BMW (Germany),

Fiat (Italy), PSA (France) and Daimler (Germany).

Foreign car makers include among others Ford (US), General Motors (US), Honda (Ja-

pan), Hyundai (Korea), Toyota (Japan) and Tata (India).

See appendix Table A.1 for a complete list.

Both European and foreign car makers have production facilities in Europe and both

generate benefits for the European economy. Likewise European car makers also have

production facilities outside of Europe.

Source: Copenhagen Economics



16

Production in the EU has also yet to recover from the effect of the crisis, cf. Figure 1.3.

While production grew in 2010 and 2011 it saw a decline of 7 per cent in 2012.

In the base forecast (assuming no FTAs), the decline is expected to continue in 2013

where after production will increase from 2014 towards 2020, cf. Figure 1.3. This is driv-

en both by an expected rising demand in Europe, cf. Figure 1.2, but also by expected ex-

port growth even in the absence of new FTAs.

Figure 1.3 Production in the EU is picking up after 2013

Note: Includes cars and light commercial vehicles. Covers production of domestic OEMs in the EU as well as

foreign OEMs in the EU.


reserved.

Relative to world production in 2012, 23 per cent of global passenger cars were produced

in the EU. A slightly bigger share of cars was produced in China (25 per cent of all passen-

ger cars) NAFTA and Japan produced 11 per cent and 13 per cent of the total respectively.



17

Figure 1.4 Share of world passenger car production 2012 (%)

Note: Asia Other: Australia, Indonesia, Malaysia, Taiwan, Thailand; Europe Other: Ukraine, Serbia, Tur-

key; Others: Argentina, Egypt, Iran, South Africa, Uzbekistan.

Source: Authors’ calculation based on data from OICA.

Of the top 20 largest car producing countries in the world in 2012, seven were European.

Germany is by far the largest producer in Europe producing 5.4m passenger cars in 2012.

The second and third largest EU producing countries are France and Spain, cf. Figure 1.5.

Figure 1.5 Top 20 car producing countries, 2012 Mio. units

Note: Passenger cars in 2012. EU countries are marked with light pink.

Source: Authors’ calculation based on data from OICA

EU27

23%

NAFTA

11%

Japan

13%

China

25%

South Korea

7%

India

5%

Asia Others

6%

Brazil

4%

Others

2% Russia

3%

Europe Others

1%

15,5

14,6

8,6

5,4

4,2

4,1

3,3

2,6

2,0

1,8

1,7

1,5

1,5

1,2

1,0

0,9

0,9

0,9

0,7

0,6

0,5

0 2 4 6 8 10 12 14 16 18

CHINA

EU27

JAPAN

GERMANY

SOUTH KOREA

USA

INDIA

BRAZIL

RUSSIA

MEXICO

FRANCE

SPAIN

UNITED KINGDOM

CZECH REPUBLIC

CANADA

THAILAND

SLOVAKIA

IRAN

INDONESIA

TURKEY

POLAND



18

While China is the largest producer of cars in the world, most of the production is in the

lower value entry-level segment. The EU is characterised by producing higher value vehi-

cles compared to other markets. In the EU, 32 per cent of cars produced are in the premi-

um segment compared to 8 per cent in the US and 5 per cent in China. This is largely

driven by production in Germany were 54 per cent of produced cars are in the premium

segment, cf. Figure 1.6.

Figure 1.6 Share of production in each country by segment 2012

Note: Segments are based on global production price class (see box)


reserved.

The segments used (entry, mid and premium) are based on price segments, cf. Box 2.

Box 2 The segments entry, mid and premium

The analysis divides the industry into three major vehicle segments according to the

brand and the market positioning of vehicles in different regions. The premium seg-

ment (representing highest prices and margins) comprises 10 percent of the market.

The value segment is the mid-price range; this comprises the vast majority of vehicles

sold in all markets (70 percent). The entry segment refers to the least expensive vehi-

cles in the different vehicle classes, making up the other 20 percent.

We have chosen to use segments based on price classes rather than segments based

on size (such as production segments A, B, C,… or sales segments such as mini, com-

pact, mid-size, …). The price class segments provides a categorisation of different

models based on where the specific model places itself on price relative to other mod-

els of similar size. Consequently, a premium priced smaller car (e.g. Audi A3) is cate-

gorised as premium although from a size perspective it is in the C-segment. Similarly

the Peugeot 308 is in the mid-price class, while it is also a placed in the C-segment

when it comes to size.

Source: Based on data supplied by IHS Global SA; Copyright © IHS Global SA, 2013 and McKinsey (2013).

99% 94% 87%

79%

62% 49% 46%

16%

6% 13%

16%

25% 43%

22%

30%

5% 13%

8%

32%

54%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

India Brazil South Korea China Japan USA EU27 Germany

Premium Mid Entry



19

Examining world production by manufacturer, Toyota comes out as the largest producer

with 9.8m vehicles produced in 2012. Second is Volkswagen with 9.1m vehicles, while

General Motors was the third largest producing 7.7m vehicles, cf. Figure 1.7 (OEMs of

European Origin are marked with light pink).

Figure 1.7 Top 20 largest manufacturers by OEM, 2012

Note: Production numbers are based on manufacturer group in production data provided by the European

Commission. Includes passenger cars and light commercial vehicles. Manufacturers of European origin

are marked with light pink.


reserved.

The production by European OEMs in Europe is both for the European market and for

exports. In 2005, net exports by European OEMs were 1.7m cars. Likewise foreign OEMs

produce cars in Europe, but they also import cars to Europe in order to match supply with

demand, cf. Figure 1.8.



20

Figure 1.8 Net exports and net imports of domestic and foreign

OEMs in EU, 2005

Note: Net export is calculated as production less sales. Net import is sales less production. Unsold vehicles are not accounted for.


reserved.

By 2012, net exports of European OEMs had risen to 3.4m vehicles, while net imports of

foreign OEMs vehicles had decreased by 0.1m to 1m vehicles, cf. Figure 1.9. The drop in

sales occurred for US and Japanese OEMs, who saw a decrease of approximately 1m vehi-

cles each. Meanwhile the Korean OEMs saw an increase in sales. The pattern for produc-

tion was slightly different with most of the decline being for US OEMs, who saw a decline

of approximately 1.5m vehicles. Japanese OEMS experienced a decline of approximately

300,000, while Korean OEMs increased production from zero to approximately 500,000

vehicles.


OEMs in EU, 2012

Note: Net export is calculated as production less sales. Net import is sales less production. Unsold vehicles are not accounted for.


reserved.



21

1.3 The outlook: Business as usual will be poor business Towards 2020, both production and sales of European and foreign OEMS in the EU is

expected to increase, and net export is expected to increase as well, cf. Figure 1.10.


OEMs in EU, 2020

Note: Net export is calculated as production less sales. Net import is sales less production. Unsold vehicles

are not accounted for.


reserved.

Seen in the bigger picture, the global importance of Europe as an automotive production

hub is declining. While the European share of total world production is expected to de-

crease from 19 per cent in 2012 to 17 per cent in 2020, the share of total production taking

place in China is expected to increase from 22 per cent in 2012 to 28 per cent in 2020, cf.

Figure 1.11.

The production in the EU is expected to continue to be dominated by German car makers.

The share of total production by German car makers has been on the rise since 2005 and

is expected to stay at the 2012 level of 44 per cent towards 2020. Likewise the share of

production by US and Asian car makers in the EU is expected to be relatively constant

towards 2020.

Examining the development of production by size segment we find that since 2005 a larg-

er proportion of vehicle production has been in the A- and C-segments, while the propor-

tion of cars in the D-segment has declined. Cars in the A-segment are models such as the

Ford Ka and Suzuki Alto. The C-segment covers cars such as the Volkswagen Golf and the

Mazda 3. The D-segment, which has seen a decline in production, includes the Hyundai

Sonata and the Peugeot 407.

Since 2005 the production structure in the EU has shifted towards a higher share of pro-

duction of cars in the premium price segment. In 2005, 24 per cent of the cars produced

in Europe were in the premium price segment while in 2012 the share was 32 per cent.



22

Towards 2020 the share of vehicle production in the premium price segment is expected

to remain at 32 per cent.

Figure 1.11 Development of European vehicle production struc-

ture

Note: Premium segment includes: BMW, Mercedes, Audi, Lexus, Infinity, DS. Mid-range segment includes: PSA, Renault-Nissan, Toyota, Suzuki, Fiat, Opel, VW.

Entry segment includes: Dacia, Chery, Hyundai, Chevrolet


reserved.

The critical situation in Europe is intensified by low capacity utilisation at the car manu-

facturing plants in Europe. Low utilisation has an impact on profitability, particularly for

manufacturers dependent on entry and mid segment vehicles for revenue, and most man-

ufacturers producing in this segment reported losses on their European operations in

recent years. Theoretical maximum capacity in Europe has continued to increase since

2000 and throughout the crisis, although production has declined. Consequently, Euro-

pean car makers are facing growing overcapacity, quite contrary to the situation in the

US, where significant restructuring of production capacity took place, cf. Figure 1.12.

According to ACEA, the current average overcapacity across Europe is in the range of 25-

30%. This overcapacity is not evenly spread across Europe; some manufacturers are oper-

ating at 50-60% of their capacity, whereas others are at 80-90% or even higher. Accord-

ing to ACEA, a number of European manufacturers have already announced that they

have no alternative but to implement significant restructuring plans.5

5 http://www.acea.be/index.php/news/news_detail/press_release_european_automobile_manufacturers_call_for_eu_policy_on_autom

http://www.acea.be/index.php/news/news_detail/press_release_european_automobile_manufacturers_call_for_eu_policy_on_autom



23

Figure 1.12 Consolidation in the US - Overcapacity in Europe

Note: 1) Based on maximum production capacity; theoretically 24 hours, 7 days per week; usually con-

strained by paint line capacity

Source: McKinsey (2013)

This picture is confirmed by our analyses showing a capacity utilisation of 68 per cent on

average between 2010 and 2013, which is below profitable levels, cf. Figure 1.13. Conse-

quently, OEMs in Europe are facing a major challenge in dealing with the restructuring

that is clearly required.

Figure 1.13 Excess capacity of car plants in Europe

Note: Overall utilisation rate of the European automotive industry. Precise data on overcapacity are subject

to discussion, as it depends on the number of shifts used in a given factory amongst other things.

Some spare capacity is needed for business flexibility.

Source: LMC Automotive (2011) p. 20, ACEA (2013).



24

Low utilisation is not an issue in all companies and countries. The companies and plants

which are struggling with a decline in market share are under particularly pressure. This

is especially true for non-German manufacturers. Generally the German manufacturers

have higher capacity utilisation than other European and foreign manufacturers in Eu-

rope, cf. Figure 1.14.

Figure 1.14 Capacity utilisation by manufacturer, 2013

Note: Estimated utilisation rates are based on straight time utilisation for European production facilities


reserved.

Contrary to the United States, only limited restructuring has taken place in Europe fol-lowing the crisis, and some new plants have been opened, mainly in Central and Eastern Europe. Overcapacity introduces a continued situation of price war (especially in the mid- and entry range segments), negative profitability on new vehicle activity and further weakening of the weakest players.

Mid-range manufacturers are the most affected, and a return to sustainable plant utilisa-

tion rates of around 75-80 per cent in this segment would imply closure of up to ten

plants for the most affected manufacturers6: five plants in the short term and potentially

five additional if the market trend continues, cf. Figure 1.15.

Several mid-range OEMs have already announced plans to close production facilities

within the next 2-4 years:

Ford’s plant in Genk will be shut down at the end of 2014

PSA’s plant in Aulnay is expected to be shut down at the end of 2014

6 According to Roland Berger (2013), it is estimated that there are currently 43 mid-range manufacturing plants in

Europe. Total plant count is 123. The average production capacity per plant for all mid-range OEMs in Europe is es-

timated at approximately 200,000 vehicles. Taking into consideration that – in case of plant closures – production

capacities may be partially shifted to other plants in Europe (e.g. Ford plans to shift a part of its production from

Genk to its facility in Valencia) the total figure of capacity reductions per plant should be lower. Based on industry

knowledge, it is estimated that capacity declines by 30,000 to 70,000 per plant closure.



25

The GM/Opel plant in Bochum will be shut down at the end of 2016

In total, European OEMs have announced capacity reductions of 750,000 vehicles by

2015 according to McKinsey analysis.7 A reduction by 750,000 units would require clo-

sure of around 10 plants of average size, but given how the market is likely to develop,

that may not be enough. If OEMs in Europe do not revise their production capacity be-

yond the announced adjustments, the McKinsey study estimates it could be five years

before the industry gets back to its pre-crisis utilization rate and related profitability lev-

els.

Figure 1.15 Mid-range manufacturers plant closures from re-

turning to sustainable capacity utilisation

Note: Figures are from 2012.

Source: Roland Berger analysis.

Closure of 10 average size manufacturing plants will also affect automotive employment.

The impact is estimated to be a loss in the range of 40,000 jobs (five plants) and 80,000

jobs (10 plants), including outsourcing.

1.4 Employment in vehicle manufacturing in Europe Employment in vehicle manufacturing in Europe is at the same level as before the crisis,

but it can be expected to decrease given the current outlook.

Lifting capacity utilisation back to sustainable levels will also require more demand for

cars produced within the EU. As presented in Figure 1.2, demand is expected to rise in the

coming years which, along with plant closures, which will contribute to higher utilisation

rates. We estimate that raising average capacity utilisation from 68 per cent to 80 per

cent will correspond to increased production of approximately 2.5m vehicles.

7 See McKinsey (2013).

43

33

5

5

#plants

Utilisation 62 75% 80%

Very

likely Depending

on

economic context



26

Figure 1.16 Employment in vehicle manufacturing is at the same

level as before the crisis

Note: Industry classification changed from NACE 1.1 to NACE 2.0 in 2007. Figures are based on employment

within manufacturing of motor vehicles, trailers and semi-trailers (NACE rev.1.1/2.0: 34/29) for the

working-age population (age 15-64) within EU27 countries.

Source: Copenhagen Economics based on Eurostat data.

The automobile sector remains important to the EU economy in terms of employment

with employment in vehicle manufacturing being 3.0m in 2011.8 As the production of

passenger cars in Europe would need to adapt, a pressure to reduce employment in vehi-

cle manufacturing is also likely to follow in the mid-term. This will also have negative

repercussions on jobs in the supplier industries.

According to estimates by Roland Berger Strategy Consultants, approximately 10 per cent

of a total 750,000 automotive supplier jobs could be at risk in Western Europe alone, cf.

Roland Berger (2013). This is based on an estimate that 5-7 percent of the jobs in supplier

firms in sales, general and administration (SG&A) are at risk of being reduced and a simi-

lar percentage for research and development (R&D) jobs. The actual manufacturing jobs

in operations are likely to suffer the most and a drop of 10-13 percent is foreseen, cf. Fig-

ure 1.17. All in all, this shows that at least 75,000 supplier jobs are at risk in the “business-

as-usual” scenario in Western Europe alone.

8 Please refer to Chapter 5 for more analysis of the employment and economic footprint of the EU automotive indus-

try.

2,4 2,4 2,4

2,7 2,7 2,8

2,9

3,2

2,9 2,8 3,0

0

0,5

1

1,5

2

2,5

3

3,5

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Mio.



27

Figure 1.17 Employment at automotive suppliers are also at risk

Source: Roland Berger (2013)

The rather bleak outlook for automotive production and employment will be somewhat

counter-balanced by the opportunity presented by the global increase in demand for new

cars, especially in emerging markets. But for that opportunity to generate jobs in Europe,

exports of cars manufactured in Europe would need to increase.

But while growing exports to emerging markets certainly will benefit the European car

makers, it may not happen to quite the extend one could hope for. The reason is that Eu-

ropean car makers generally tend to serve emerging markets from production locations

outside Europe, in which case European automotive employment will not necessarily

benefit from this growth.

To analyse this aspect in more detail, we have looked closer at eight main markets outside

Europe:

BRIC (Brazil, Russia, India and China)

NAFTA

Japan

ASEAN

South Korea

Again following the base forecast (without the impact of FTAs) production and sales of

European OEMs is expected to increase in all eight main markets, cf. Figure 1.18. But in

the eight markets, combined sales are going to increase only slightly more than produc-

tion, making little room for increased exports from Europe (and from EU producers’

plants elsewhere) to these markets, cf. Figure 1.19.



28

Figure 1.18 Production and sales of European car manufactur-

ers in main markets is going to increase


reserved.

Figure 1.19 All of the growth in sales of EU OEMs in key markets

is going to be served by local production

Note: Total for main markets consisting of Brazil, Russia, India, China, NAFTA, Japan, ASEAN and South

Korea


reserved.

1.5 Summary To summarise, the current state of play for European car makers and car making in Eu-

rope is one with weakened profitability and production below sustainable capacity utilisa-

tion levels. Furthermore, even though the outlook is more positive, adjustments in pro-

duction capacity, notably in the mid-segment, can be foreseen if the current and medium-

term market outlook materialises.



29

We note that the current situation for European car makers is primarily a result of domes-

tic demand factors and a lack of adjustment to the new and weaker home market demand.

Changes in net imports from non-European countries have only been very small in com-

parison, and in our assessment, imports cannot be seen as a substantial cause for the

weak situation for car manufacturing in Europe.

With weak demand at home, and with current market shares for European car makers in

foreign markets being relatively low, growth in emerging markets is needed to reinstate

the profitability of European car manufacturing.

Increasing the market share for European car manufacturers in foreign markets seems to

be a likely key driver for reinstating a healthier situation for car manufacturing in Europe.

To assess these possibilities, we shall turn to the analysis of how cars are traded.



30

Chapter 2

2 How cars are traded

In this chapter we analyse how cars are traded, and in particular we map the trade flows

in and out of Europe, and find that there is little impact from trade liberalisation to date.

We find that most of the cars being sold in Europe, regardless of the origin of the car

maker, are also made in Europe, i.e. a large part of the sales by foreign OEMs in Europe

are made or assembled in Europe. We also look at how European car makers are entering

and selling in foreign markets, and we find that modes of entry differ from market to

market and from car maker to car maker.

2.1 Current trade situation The EU has a trade surplus in automobile products with the rest of the world, and this

surplus has been increasing in recent years, cf. Figure 2.1. This is true for both cars (left

side) and parts (right side).

Figure 2.1 Continued and growing surplus in automotive trade

Note: Car product categories include all or some sub-categories within: HS8703 and HS8704. Parts include

19 product codes listed in appendix C.

Source: Copenhagen Economics based on data from Eurostat.

While exports have increased, home market demand has decreased, as presented in Chap-

ter 1, leaving the European auto industry in dire straits. Exports have increased since

2005 and the EU also has a trade surplus with most of the main trading partners individ-

ually, both in cars and in parts, except Japan and South Korea, cf. Figure 2.2. The EU has

a surplus in cars with Japan, but a deficit in parts and components. Combining them

shows a deficit in trade with Japan because of the large import values in parts and com-

ponents, which in part relates to the significant production by Japanese car manufactur-

ers in the EU.



31

Figure 2.2 Trade detailed for the EU’s main FTA partners 2012

Note: Same coverage as figure 2.1. Data for 2012. Cars imports from China were around €300 mio. Imports of cars from Mercosur were around €200 mio. and exports of cars to India were around €200 mio.

Source: Copenhagen Economics based on data from Eurostat.

The United States is the EU’s largest trading partner for both complete vehicles and parts,

China is the second largest trading partner followed by Japan and South Korea. For the

US, China and Japan exports are dominated by trade in complete cars. For the US and

China exports of complete cars is twice as large as exports of parts and components, while

for Japan exports are three times the size. For South Korea, though, export of complete

cars has roughly the same values as exports of parts and components.

Imports from the United States are also dominated by complete cars with twice the value

of imports of parts and components. Imports from China are largely dominated by trade

in parts and components. In 2012 imports of parts and components from China were €3.3

billion, while imports of complete cars were only €0.3 billion. From Japan the EU im-

ported around €5.7 billion worth of complete cars and €4.9 billion worth of parts and

components while imports of complete cars from South Korea were €3.9 billion and im-

ports of parts and components were €2.6 billion in 2012.

6

25 19

6 6 4 2 2 1 1 3 1

2

10

3

8

5 2 3

1 3 4 1 1 1 0

5

10

15

20

25

30

35

40

United

States

China Japan Rep. South

Korea

Mexico MERCOSUR Canada India

€ billions

Parts Cars



32

Table 2.1 EU27 selected trading partners € Million Cars Parts and components

Imports from Exports to Imports from Exports to

United States

5,529

25,096 1,795 10,271

China

347

19,292 3,346 8,167

Japan

5,736

6,312 4,917 1,597

South Korea

3,920

2,498 2,561 1,002

Mexico

2,341

1,177 368 2,730

MERCOSUR

225

1,449 445 3,541

Canada

180

3,063 141 735

India

1,074

231 629 1,216

Thailand

394

597 506 479

Morocco

628

1,028 50 606

Ukraine

3

1,539 16 317

Singapore

1

594 41 372

Malaysia

2

644 104 303

Tunisia

1

472 198 202

Indonesia



33

2.2 Little impact from trade liberalisation to date Manufacturers producing cars in Europe are very dependent on the European market for

selling their final product. Around 10 million of the 15.8 million EU-produced vehicles in

2012 were destined for the home market, corresponding to 65 per cent of production.

A similar picture appears when looking at the EU market from a sales perspective. For the

past ten years (2003-2012) around 86 per cent of the cars sold in the EU were produced

within the region and only 14 per cent of the units sold were imported.9

Figure 2.3 Development in cars sold in Europe by origin

Note: “Produced in EU” means the number of vehicles sold in the EU in each year also being produced or

assembled at a plant in the EU (no data for Malta and Cyprus). “Imported” means the number of cars

sold being imported for outside the EU27.


reserved.

Besides the free trade agreement with South Korea, there have been no trade agreements

between the EU and other main car producing countries.

Some concerns have been raised with respect to the free trade agreement with South Ko-

rea that went into force in July 2011.10 The agreement has a phasing-in period over three

and five years depending on the car model and it will be fully implemented by 1 July 2014

and 1 July 2016 respectively. It therefore too early to evaluate the impact of the agreement

based on actual sales and import numbers. However, based on the existing data so far the

impact on the car sector has been more positive than anticipated (i.e. there was a signifi-

cant increase in export of European cars to South Korea). Chapter 4 provide a model

based analysis comparing the situation without an agreement with Korea with a counter

factual scenario of a fully implemented agreement.

9 Based on EU-25 numbers for the entire period. No data for Malta and Cyprus. 10 ACEA, the European Automobile Manufacturers Association, has openly criticised the agreement. See for example

European Parliament, Policy Briefing, September 2009, EXPO/B/POLDEP/2009/173, accessed at:

http://www.europarl.europa.eu/meetdocs/2009_2014/documents/inta/dv/792/792791/792791en.pdf

0

2

4

6

8

10

12

14

16

18

20

2005 2006 2007 2008 2009 2010 2011 2012

Millions

Total sales

Produced

in EU

Imported

http://www.europarl.europa.eu/meetdocs/2009_2014/documents/inta/dv/792/792791/792791en.pdf



34

As a background for the assessment of the impact of free trade agreements with other car

producing countries such as Korea, it is instructive to take a closer look at the develop-

ment in the sales by the main Korean car producers, Hyundai and Kia (now partly owned

by the Hyundai group).

Until 2007, there was limited production of Hyundai and Kia cars within the EU, and

almost all cars sold in the EU were imported. However, in recent years the Korean manu-

factures have invested substantially in Europe, and the production in 2012 amounted to

more than 500,000 units, at the two European plants:

In 2005, Kia opened its European plant at the initial cost of €1 billion,

in Žilina, Slovakia, about 200 kilometres north-east of Bratislava. The capacity of

the plant is 300,000 units per year.11

In 2008, Hyundai opened its European plant in Nošovice, Czech Republic, fol-

lowing an investment of over €1 billion and over two years of construction. The

plant has an annual capacity of 300,000 cars. The Hyundai plant is 90 kilometres

north of Kia Motors' Žilina Plant in Slovakia.12

This development means that Korean cars of a regional European origin now exceeds the

number of imported cars, and while imports of Kia’s and Hyundai’s have increased from

2011-2012, so has sales of these cars from the two European plants, cf. Figure 2.4.

11 Currently Zilina builds the Cee’d family (five-door hatchback, five-door wagon) and Pro-Cee’d (three-door coupe)

and Sportage SUV models. The intention is to supply 40 per cent of European demand for Kia products with Europe-

an-made vehicles. Company website and wikipedia. 12 The plant mainly manufactures the i30, ix20, ix35 for the European market. Company website and wikipedia.



35

Figure 2.4 Development in Korean brands* sold in the EU

Note: *) Diagram includes Hyundai and Kia cars. “Produced in EU” means the number of vehicles sold in

EU25 in each year also being produced/assembled at a plant in the EU (no data for Malta and Cyprus).

“Imported” means the number of cars sold being imported from outside the EU27.


reserved.

Furthermore, it should be noted that the imported cars of the main Korean car brands,

Hyundai and Kia are not all sourced from South Korea when sold in Europe. The Hyundai

group had production in 12 different countries in 2012. Besides South Korea and the two

plants in the EU, Hyundai’s and Kia’s are also produced in India, Turkey, Russia, Egypt,

Iran, China, Brazil, Vietnam and the U.S. The Hyundai group is supplying Europe from its

plants in South Korea, India and increasingly from Turkey. In 2010, for example, the EU

imported as many cars from the Hyundai group from India as from South Korea (approx-

imately 125,000 units from each).

Since 2010, imports of vehicles from the Hyundai group from India to Europe have

dropped by 40,000 units while the group’s imports from South Korea increased by

65,000 units over the same period. Imports by the Hyundai group from Turkey also in-

creased between 2010 and 2012 by around 30,000 units. But a much bigger increase was

seen in output from the EU located plants, which supplied 100,000 units more to the

European market in 2012 than in 2010 (up from 300,000 to 400,000 units).

So in absolute terms it is difficult to see that the free trade agreement with Korea is having

dramatic effect as of 2012, but a number of caveats apply because a) it is still too early to

expect the full effect of the FTA, b) the Hyundai/Kia models being produced in Europe are

not necessarily close substitutes with the models being produced in South Korea, and c)

the imported Hyundai/Kia cars may be in closer competition with other imported cars or

with other models being produced within the EU. All these features are being taken care

of in our detailed simulations in Chapter 4.

Total sales in EU

market

Produced in EU

Imported

0

100

200

300

400

500

600

700

800

2005 2006 2007 2008 2009 2010 2011 2012

Thousands



36

Trade with the potential partners

In this report, we analyse the potential impact of FTAs with 19 main trade partners. The

partners represent 58 per cent of total EU export of cars in 2012 (including China). Look-

ing at the import side, we find that the partners cover 75 per cent of total car import. We

furthermore see that the trade balance is positive overall when looking at values of trade

and is also positive for the 20 partners in combination.

Looking further at the trade volumes with the main FTA partners for Europe, it is shown

that 14 per cent of total imports of complete cars (measured in value) are from South Ko-

rea. The 20 partners have a combined share of 75 per cent of total EU imports of complete

cars, and four large car producers (S. Korea, US, Japan and Mexico) account for over 60

per cent of total imports in 2012. On the export side, the picture is naturally more diversi-

fied. The 20 partners account for 58 per cent of total EU exports of complete cars in 2012.

The four main partners with respect to EU export (US, China, Japan and Canada) account

for 48 per cent of the total EU exports.



37

Table 2.2 Trade in complete cars with main partners 2012

FTA Partner EU export

(bn. euro)

EU export

(pct. of total

extra EU)

EU import

(bn. euro)

EU import

(pct. of total

extra EU)

South Korea 2.5 2.2% 3.9 14.4%

Central America 0.2 0.1% 0.0 0.0%

Columbia-Peru (Columbia) 0.2 0.2% 0.0 0.0%

Columbia-Peru (Peru) 0.1 0.1% 0.0 0.0%

Singapore 0.6 0.5% 0.0 0.0%

Canada 3.1 2.7% 0.2 0.7%

India 0.2 0.2% 1.1 3.9%

Japan 6.3 5.6% 5.7 21.1%

Ukraine 1.5 1.4% 0.0 0.0%

MERCOSUR 1.4 1.3% 0.2 0.8%

Malaysia 0.6 0.6% 0.0 0.0%

Vietnam 0.0 0.0% 0.0 0.0%

Morocco 1.0 0.9% 0.6 2.3%

United States 25.1 22.3% 5.5 20.3%

China (FDI) 19.3 17.1% 0.3 1.3%

Mexico 1.2 1.0% 2.3 8.6%

Thailand 0.6 0.5% 0.4 1.4%

Tunisia 0.5 0.4% 0.0 0.0%

Indonesia 0.2 0.2% 0.0 0.0%

Egypt 0.3 0.3% 0.0 0.0%

Jordan 0.1 0.1% 0.0 0.0%

Sum of 20 partners 65.1 58.0% 20.4 75.0%

Total extra-EU 112.6 100.0% 27.2 100.0%

Note: ASEAN include: Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Burma (Myanmar),

Cambodia, Laos and Vietnam. Amounts in billions of euros. Complete cars include: HS870321-90 and

HS870421.

Source: Copenhagen Economics based on Eurostat.

2.3 Cars sold in Europe are mostly made in Europe Most of the cars that are sold in Europe are also produced in Europe and all the main

OEMs of non-European origin have production plants in Europe, cf. Figure 2.5.



38

Figure 2.5 Automobile Assembly Plants in Europe by OEM and

manufacturer origin

Note: Automobile assembly plants within EU27, based on source plant ownership based on manufacturer.

Numerical value indicates total number of plants located in EU27 countries

Source: Copenhagen Economics based on Eurostat data.

Imports account for 14 per cent of sales in the EU and local production accounts for the

remaining 86 per cent of sales, cf. Figure 2.6. This includes production and sales from

both EU and non-EU OEMs. The share of imports is generally lower in the main Asian

markets, while the share of imports in sales is higher in NAFTA countries, Russia and

Brazil, cf. Figure 2.6.

Figure 2.6 Share of imports in total sales by market, 2012


reserved.

78%

49%

43%

32%

23% 19%

14% 9% 6% 6% 6%

0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Canada Mexico United

States

Russia NAFTA Brazil EU27 South

Korea

ASEAN Japan China India

Renault/Nissan – 14

PSA – 9

Sevel (PSA/Fiat)- 2

FIAT – 10

Other manufacturers – 15

Total number of plants – 123

FORD – 11

General Motors – 14

BMW Group – 6

Daimler – 11

Volkswagen – 28

Toyota – 3

Honda – 1

Mitsubushi – 1

Geely – 3

SAIC – 1

Tata – 3

Hyundai – 2



39

As the global competition for production locations is becoming more intense, the share of

imported vehicles in total EU sales is increasing for both foreign and domestic OEMs.

Additionally, OEMs are aligning their global production capabilities to regional differ-

ences in demand and to existing trade patterns (e.g. BMW is producing most of its X-

series SUVs in its Spartanburg plant in the US). The decisions on production location

certainly depend on a range of factors including labour costs, tax incentives and R&D and

supply chain clustering.

According to detailed data based on known plans about production locations and ex-

pected volume of production at each plant for ten EU car makers globally, we have ana-

lysed the expected development between 2012 and 2020.13 This shows that while produc-

tion in Europe is expected to increase between 2012 and 2020, the growth is expected to

be even stronger outside Europe. In 2012, 53 per cent of the light vehicles (passenger cars

+ LCV) produced by EU car makers where produced in Europe. Although the production

volume in Europe is expected to grow by 14 per cent between 2012 and 2020 according to

known plans, the growth will be significantly higher at the plants outside the EU by the

same ten EU manufacturers. Production outside the EU is expected to grow by more than

50 per cent. Consequently, the picture will change by 2020, and more cars will be pro-

duced by the ten EU originating car makers outside the EU (55 per cent) than within the

EU (45 per cent), cf. Figure 2.7.

Figure 2.7 Location of production for 10 main EU car makers

Note: This analysis covers 1o main EU manufactures (VW, BMW, Audi, Mercedes, Skoda, Seat, Peugeot,

Citroën, Renault, and Fiat).


reserved.

The base forecast contains the predicted sale in each market and by combining this data

with the production forecast a split between local production and import can be obtained

model by model. This can allow us to look at share of vehicles sold in the EU market by

13 Based on data supplied by IHS Global SA; Copyright © IHS Global SA, 2013. All rights reserved.

53% 45%

47%

55%

0

5

10

15

20

25

30

2012 2020

Millions

NonEU EU



40

origin of the car maker (domestic or foreign) and whether the units are imported or pro-

duced within the EU.

Looking at imports by origin of the car maker we see that imports account for a larger

share of foreign car makers in Europe is gradually expected to increase from the current

26 per cent towards 33-35 percent between 2016 and 2020. The share imports for EU car

makers is lower from the outset, 8 per cent in 2013, but expected to increase to 13 per cent

for their sales in the EU by 2016-2020.

Figure 2.8 Share of imported vehicles in total EU sales (%)


reserved.

The above development is based on information about known plans for production loca-

tions and volume of production at each plant. The forecast used is the so-called base fore-

cast, which is a “no policy” forecast. It follows that there is a degree of uncertainty as to

whether all plans will materialise as foreseen.

Another analysis along the same lines is based on the historic development. This shows

that the drop in sales in the EU since 2007 have been more severe (measured in percent-

age-terms) for foreign (non-EU) car makers than for EU car makers. Sales in the EU of

foreign brand cars made in the EU dropped 32 per cent between 2007 and 2013 and sale

of foreign brand cars being imported to the EU dropped by even more (36 per cent). In

comparison, sales of EU brands made in the EU dropped by 26 per cent.

31% 28%

26% 26%

32%

35% 33% 34%

5% 6% 7%

8% 9%

13% 13% 13%

15% 15% 14% 14% 17%

21% 20% 21%

0%

10%

20%

30%

40%

50%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Foreign Domestic All

Base Forecast

the impact of trade liberalisation on the eu automotive ......industry in dire straits. car makers...

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