Companies focus on cost cuts as Europe struggles

Written by Reuters | Dagenham | Updated: Jul 29 2013, 17:07pm hrs
Glistening chains on the turnstyles at Ford Motor's plant in east London illustrate how, even when companies unveil positive news about their European operations, it may not mean things are picking up in the economy.

Ford told investors this week that its European operation was performing better than expected and that its turnaround on this side of the Atlantic was on track.

But this recovery is largely premised on cutting costs, with demand for vehicles still falling across the continent and the industry facing overcapacity.

"The outlook for the business environment in Europe continues to be uncertain," Bob Shanks, the U.S. automaker's chief financial officer, told analysts on Wednesday.

A day later work stopped at the 750-strong Dagenham plant, which made bonnets and doors for Transit vans, and workmen lowered white concrete barriers across the entrances to employee car parks - all part of Ford's plan to create a "more efficient manufacturing footprint" in Europe. Aggressive cost-cutting in Europe contributed to the better-than-expected second-quarter profit General Motors reported on Thursday.

Other sectors are also cutting back. Kimberly Clark shut a Spanish factory after the company decided to stop selling its Huggy diapers in most European markets and exit other businesses on the continent.

US advertising group Interpublic, supermarket chain Carrefour, electrical goods makers Indesit and staffing group Randstad were among the companies which told investors in the past fortnight that weak European demand was forcing them to cut costs and jobs.

"Whatever earnings growth is coming is base-line activity or cost cutting. Capex (capital expenditure) is where companies are saving money, trying to keep the bottom line healthy," said Chris Weafer, senior partner with consultancy Macro-Advisory.

Recent economic data has suggested the euro zone is starting to turn a corner and Britain looks definitively to be back on a growth path.

Those improvements in leading indicators have prompted institutional investors to look at Europe with new interest.

With stock markets in Japan and the US posting double-digit gains so far this year, investors may have squeezed as much as they can out of a recovery story there and are looking for the euro zone and Britain to pick up the growth baton.

But it will take more than the first tips of green shoots to persuade companies to invest heavily once more.

Investment plummeted after the financial crisis, with the euro zone business investment rate in the last quarter of 2012, the most recent period for which figures are available, at its second-lowest level since 2001.

The widespread focus among executives on scaling back, and the dearth of plans to spend more, highlighted how Europe was not out of the woods yet, despite some recent positive signs from Eurozone Purchasing Managers' surveys last week, said Yiannis Koutelidakis, economist at Fathom Consulting.

The absence of spending from companies is contributing to a chicken and egg situation, delaying the recovery that might prompt them to spend more.

"The lack of investment and the continued government austerity, is definitely a drag on the outlook," said Bert Colijn, economist at the Conference Board, a research organization. "If we see a recovery in Europe in the second half of the year, which is something that is becoming more realistic, that recovery will be very slow."

Some businesses said predictions of recovery in the second half of 2013 were optimistic. Marco Milani, Chief Executive of Italy's Indesit, said he wasn't confident of recovery in 2014 and consequently was cutting back investment and shifting manufacturing out of Europe.

In June, the company published a plan that envisaged cutting its Italian workforce by a third and moving some operations to emerging markets, including Turkey.

Economists say these kinds of actions pose long-term risks for Europe, because even when demand recovers, it will increasingly be served from outside the continent. "The crisis will leave structural scars on the economy," Koutelidakis said.

Corporate belt-tightening could even be accelerated if the US starts withdrawing monetary stimulus.