Milan: Europe's car industry is edging closer to making painful and costly production cuts that industry executives acknowledge are the only way of nursing loss-making businesses back to health.

When the industry hit crisis in 2009, European carmakers largely put off the pain with the help from government loans in the hope economic recovery would erase the need for cuts. The recovery came, but was short-lived and carmakers are again facing a downturn.

That is in stark contrast to their counterparts in the US, who delivered major capacity cuts in exchange for government bailouts. The slimmed-down US industry shed a total of 1.5 million units capacity from 2007-12.

The number of factories fell to 54 from 64, sending capacity utilisation shooting to an expected 82 per cent in 2012 from 66 per cent in 2008, according to figures from IHS Automotive. Detroit's Big Three automakers closed 13 plants during that time.

In Europe, with 241 plants in 27 countries, just three factories have closed, or are slated to, in the same period. This leaves capacity utilisation at an expected sluggish 65 per cent this year, according to figures from IMC-Auto.

Carmakers need to run plants at about 80 per cent capacity to break even, Calum Macrae, PwC's lead automotive analyst, said.

Tipping point

The European industry seems to be reaching a tipping point. A grinding price war in a withering market, combined with high overheads from excess manufacturing capacity, has forced General Motors (GM) and Peugeot into an alliance to share production, development, and purchasing costs.

Peugeot CEO Philippe Varin acknowledged for the first time that the alliance will affect production plans from 2016, when Peugeot and GM are planning to begin assembling some vehicles on shared production lines.

"Our factories already assemble Peugeot and Citroen cars on the same lines," Varin said. "In the future, PSA factories may also assemble GM cars and vice versa."

Eschewing job losses

The overcapacity problem in Europe is region-wide, but national governments shirk from job losses on their own turf, so end up offering a financial lifeline that does little to solve the underlying mismatch between supply and demand.

In Europe, restructuring "is seen as a change, but not a positive change," Wolfgang Schneider, vice president of Ford Europe for governmental and legal affairs, said. "Restructuring is job losses. Job losses. Job losses."

Unions justify it by saying an unemployed car worker in, say, Spain finds it a lot harder to move to a job in another country such as Slovakia, than his US counterpart would to move from Detroit to another state.

According to the European Automobile Manufacturer's Association (ACEA), 13.1 million new cars sold last year in the EU and this is expected to fall this year, for the fifth year in a row.

European car makers have an excess capacity of up to 4.4 million units, according to figures from PcW Autofacts 2012.

That's a lot of capacity. Most plants make, say, 250,000-300,000 cars a year running at full speed. Closing GM's Opel-Vauxhall plant at Bochum in Germany and Ellesmere Port in Britain, say, would only be a drop in the bucket.

Peugeot CEO Philippe Varin's statements, however, could indicate that some of the two automaker's emptier factories may be destined for closure. GM's guarantee not to close Opel plants expires at the end of 2014, and Varin has said the future of Peugeot's Aulnay plant north of Paris is in doubt beyond that year.

Peugeot's plant in Madrid is seen as vulnerable, as are GM's sites at Bochum, Ellesmere Port, and Zaragoza in Spain. Closing plants is expensive - to shutter PSA's Spanish factory at Villaverde would cost about 309 million euros, broker Bernstein estimated in a research report published last month.

Politicians in Europe - where economies are reeling from deep spending cuts in austerity budgets - are already positioning themselves for the job cuts that seem increasingly likely.

"Governments regard part of their job as to create and protect employment so Britain and Germany will be fighting to keep their plants alive," said Paul Niewenhuis, director of the Center for Automotive Industry Research (CAR) at Cardiff University.

"Cars aren't like trainers - you can't make them all in China - and there is a view in the auto industry that cars need to be made close to where they are sold."

Britain's business secretary Vince Cable met GM chief executive Dan Akerson in New York to urge the company to spare its Vauxhall plant in Ellesmere Port, north- west England, as part of plans to cut costs across its European operations.

A source with knowledge of the talks said the UK minister pressed the business case for keeping production in Britain and raised the possibility of GM producing other products at the factory.

Fiat chief executive Sergio Marchionne has been lobbying for an EU-wide solution. But so far, a European version of US President Barak Obama's automotive task force is nowhere to be seen.

"Europeans are 'European' as long as it works," said Ford's Schneider. "When there is a challenge, then you have a breakup tendency and the old national interest patterns start to emerge."