One year after a global rescue by taxpayers, the crisis in the world's car industry is far from over. Toyota, the world's largest car-maker, is overhauling the brakes on all its cars; Daimler scrapped its dividend last week after a €2.6bn loss; General Motors is demanding €2.7bn in subsidies from European countries to save its Opel-Vauxhall operations; France's two key car manufacturers, Renault and Peugeot, lost nearly €5bn in 2009 with tough times ahead as scrappage schemes disappear.
In the understated words of Carlos Ghosn, Renault's chief executive, 2010 "will be a challenging year". January car sales in Germany, Europe's largest market, plummeted to 20-year lows as its €5bn scrappage scheme ended.
"There are worse figures to come," said Ferdinand Dudenhoffer, a professor at the University of Duisburg-Essen's Centre Automotive Research. "One million cars were bought with German tax subsidies at non-existent margins. The price structures of used and new cars were destroyed. You could buy a Nissan Micra at a 65 per cent discount. And it is continuing. You can lease a Peugeot at a 40 per cent discount."
Peugeot, Europe's second largest car-maker by units, recorded a loss of €1.2bn, its largest ever, despite the French and European scrappage schemes and French state loans of €3bn. Peugeot blamed the "severe crisis". Neither it nor Renault was prepared to provide any profits guidance for 2010.
Billions of tax money have flowed into an industry which remains basically unchanged, dogged by overcapacity and low margins, facing severe environmental and technical challenges. In the US, the taxpayer paid more than $65bn to rescue GM and Chrysler; both are now striving to produce new, environmentally friendly products, particularly electric cars, to survive. Although some capacity has closed and some older GM brands such as Saturn and Pontiac have disappeared, there is probably space only for a Big Two rather than a Big Three.
If car-makers are to generate profits to invest in less polluting products, market rationalisation is needed worldwide. Global productive capacity stands at some 90 million vehicles compared with demand for 60 million. Professor Dudenhoffer said: "The situation is particularly bad in Europe. The weak companies are undermining the strong. Prices are too low."
Changing this will involve the swallowing of national pride and accepting plant closures. For many years, deals have been mooted involving Fiat or Peugeot but they continue to look politically unacceptable. Fiat's closure of its inefficient Sicilian plant was accepted by politicians only because it will be used to produce electronic cars. Cars are politics.
The hold of the motor car over governments and voters was again revealed in 2009 by the worldwide adoption of scrappage schemes. No major country avoided the subsidy. As a result, global car sales fell by just 3 per cent last year despite the economic crisis, although the US market declined by 21 per cent because its $3bn "cash for clunkers" scheme was relatively short-lived. Its market is recovering.
In Europe, the ending of schemes in Germany, Italy, France and the UK will be painful. HSBC estimates that the German market will drop by 25 per cent and UK sales will decline by 10 per cent. Gian Primo Quagliano of Centri Studi Promotor, an automotive consultancy, expects a 20 per cent drop in Italian car sales following last week's decision not to renew the scheme.
Manufacturers have divided neatly over the subsidy. Fiat, Renault, Opel-Vauxhall and Volkswagen benefited as private owners of old bangers, encouraged to buy new rather than used cars, favoured smaller and cheaper cars. This turned the Renault-owned, Romanian-built, "super budget" Dacia into an unexpected hit.
Martin Winterkorn, VW's chairman, pushed for an extension to the German scheme while Fiat wanted the Italian scheme to continue in 2010 so it might remain just in profit. GM's Opel-Vauxhall subsidiary was kept alive by the European schemes, receiving an estimated €300m from the German taxpayer alone.
By contrast, BMW and Mercedes, whose sales plummeted last year, denounced scrappage for bringing forward sales of cars they do not make and destroying demand for their full-priced vehicles.
A trade dispute over scrappage distortions has started between the US and Japan. The Japanese "eco-friendly vehicle purchase scheme" helps Honda and Toyota while doing little for GM and Chrysler. Stephen Collins, the president of the American Automotive Policy Council, contrasted it with "the openness of the US cash for clunkers programme", from which half the benefits went to Honda, Toyota and Hyundai.
HSBC predicts that the world car market will grow from 62 million to 65 million units in 2010. It is relatively optimistic about Europe, predicting a decline from 14.8 million to 13.8 million units, with the UK market falling from 2.2 million to 2 million. However, the bank underlines that falling consumer confidence at a time of high and rising unemployment could have a strong negative impact.
Much depends on demand in China, Brazil and the US continuing to improve. It currently looks as if actual European car production, after a year of halted manufacturing and part-time working, will rise. The German luxury car marques – BMW, Mercedes, Porsche and Audi – are seeing domestic sales recover sharply from last year's lows while the sales of the BMW-owned Mini continue to grow. Audi sales rose by 40 per cent in January against the market trend. Yet Germany and Europe depend upon the US consumer and the Bric nations – Brazil, Russia, India and China – for the recovery and long-term success of their industry.
German industry is relieved to be returning to work. "We are stopping short-time working," said Stefan Wolf, the chief executive of ElringKlinger, which supplies gaskets to almost all the world's markets and manufacturers. "A year ago, I did not think that we would be where we are now. The world market is definitely picking up."
German car-makers and suppliers used the increase in sales last year to reduce unsold stocks of cars, cutting working hours and extending workers' holidays. Production looks set to increase to meet overseas demand, even though domestic sales are falling.
VW's Martin Winterkorn still expects 2010 to be a tough year for car-makers but remains highly ambitious. By 2018, VW intends to be the world's largest car manufacturer, overtaking Toyota with more than 10 million cars produced, compared to six million currently, at an 8 per cent profit margin before tax. This is a stretch if over-capacity continues.
Having taken control of Porsche, VW now boasts a remarkable range of car brands – Audi, Lamborghini, Bugatti, Seat, Bentley and Skoda – to exploit the consumers' desire for an individual-seeming product while using as many interchangeable parts and platforms as possible. It was this interchangeability which contributed to Toyota's recall crisis.
Mr Winterkorn wants VW to outstrip Toyota not only economically but environmentally. While the car industry likes to talk green, it has seen off the stringent EU emission targets, backed by severe fines, proposed for 2012. "[Chancellor Angela] Merkel and [President Nicolas] Sarkozy put it all back by three years," said Professor Dudenhoffer. "But BMW and Mercedes are already responding. It all takes time and political zigzagging does not help. The industry needs clear emissions targets, emissions trading and a price for C02. Then it will find the right technical answer at the best price."
Scrappage did at least encourage the purchase of new cars with higher fuel efficiency than the "clunkers" for which they were exchanged. Much more is needed. Current targets for C02 reduction in the US foresee the average mileage of all new cars in the US rising from 26 to 35 mpg by 2016. This will be difficult to achieve given American preferences for pickup trucks and SUVs.
However, the trend towards smaller, lighter and more powerful engines with electronic fuel injection will continue; hybrid cars will become more frequent. Yet pure battery-driven cars are much less likely to feature than many manufacturers such as GM or Chrysler would have us believe. "We think that, by 2020, less than 5 per cent of all cars will be purely electric, while 15 per cent might be hybrid," said Stefan Wolf of ElringKlinger, which is widely involved in electric and fuel reduction projects.
The challenge to pure electric cars comes from safety concerns, high battery costs, and limited driving range as well as the absence of infrastructure and international standards. Martin Winterkorn, a physicist by training, has even more basic concerns: "I will only put an electronic drive-train in a Golf when I am sure it will not explode in the owner's garage."
The much-vaunted Tesla, costing some $100,000, is hardly a Golf competitor. Toyota's Prius is, but it is relatively expensive and, depending on driving conditions, not always more fuel efficient. Mercedes revealed last month that its next S Class will be as fuel efficient as a Smart. It will, of course, be very expensive.
It looks certain hybrids will lead the development of the eco-friendly mass-market car. And electric cars will play a role in big cities. However, reductions in new car emissions look set to be dwarfed by rising global car use.