European woes hurt GM and other auto companies

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General Motors

(MoneyWatch) Even as U.S. auto sales remain relatively strong, the economic downturn in Europe is crippling profits for the auto makers. The effects are hitting both companies based in Detroit and in Europe, particularly Fiat and Peugeot.

General Motors (GM) announced this morning that its second quarter profit was down 41 percent to $1.5 billion, $1 billion less than a year ago. A key factor was a $361 million loss in Europe, compared to a $102 million profit last year; South American operations also registered a $19 million loss.

Profits in North America came in at $2 billion, but even that was 13 percent below 2011. Overall results translated to 90 cents per share, compared with the 75 cents forecast by analysts.

Similarly, Ford (F) said last week it lost $404 million in the second quarter in Europe and expects to lose $1 billion there for the full year. Ford reported a $1 billion quarterly profit, down 57 percent. However, a seven percent sales gain in North America and a $2 billion profit here helped offset the European losses. And new Ford products just going on sale, such as the redesigned 2013 Ford Escape, should help Ford finish the year strongly in the U.S., says analyst Alec Gutierrez of Kelley Blue Book.

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In Europe, the sovereign debt crisis and economic downturn are forcing auto makers to confront the issue of closing plants - a difficult task under European rules. Similar overcapacity was an issue in the U.S. but was dealt with as part of the 2008 financial crisis and government rescue. "I've never seen it this bad," Sergio Marchionne, chief executive of both Fiat and Chrysler told the New York Times. "The unresolved issues that have been plaguing the industry for a number of years have all come forward."

Fiat, which took over Chrysler during the U.S. crisis, now finds itself looking to Chrysler to offset falling sales and profits in Europe. In results reported earlier this week, Chrysler Group net income for the second quarter was $436 million - a 141 percent improvement over a year earlier. Revenue for the quarter was $16.8 million, up 23 percent and reflecting a 22 percent increase in the shipment of its vehicles.

Fiat has closed a plant in Sicily. And at Peugeot, the company is attempting to close a facility in Aulnay, France, but has set off protests from unions and the French government. General Motors has installed new management at its Opel European subsidiary and is aiming for big cutbacks there.

Like their country in general, German auto makers are stronger than companies like Fiat and Peugeot that have  more sales in beleaguered Southern Europe. Sales are strong for luxury makers Mercedes-Benz and BMW, where factories are still operating near capacity. And Volkswagen just reported an 18 percent increase in second-quarter earnings. Strong VW sales in North America, Russia, China and India offset a drop in European sales of 1.5 percent, relatively small compared to an overall 6.8 percent drop for the European auto market overall.

Auto company problems in Europe may remain intractable. Unions there have more power to block plant closings. And unlike the U.S. government in 2008, European institutions do not have enough power to step in and help engineer a solution.

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    Jerry Edgerton, author of Car Shopping Made Easy, has been covering the car beat since Detroit companies dominated the U.S. market. The former car columnist for Money magazine and Washington correspondent for Business Week, Edgerton specializes in finding the best deals on wheels and offering advice on making your car last.