Europe's car industry should be booming. Instead, it is in crisis. Dr Peter Wells, of the centre for automotive research at Cardiff Business School, explains the apparent paradox:

The recent turmoil surrounding the Rover Group and Ford in the UK has highlighted the precarious state of the automotive industry throughout Europe.

Europe can produce over 6m more cars than can be sold - equivalent to nine plants of the size of Longbridge

The market for cars in Western Europe has grown from 13.4m in 1997 to 15m by 1999.

At the same time, the market in North America (a critical export market for specialist brands such as Mercedes, Volvo, BMW, and Porsche) has been booming.

So why is the European industry in crisis?

A key problem is over-capacity. Despite strong market growth, production in Western Europe has stagnated at about 14.4m cars a year.

Yet estimated installed capacity - the capability to produce vehicles - has grown to over 21m cars per annum.

That means Europe can produce over 6m more cars than can be sold - equivalent to nine plants of the size of Longbridge.

Global restructuring

The problem is the high investment costs in the motor industry: this means that to make profits, manufacturers have to run plants at near capacity.

In an effort to maintain profitablity, European manufacturers have been intimately involved in the latest round of global restructuring. Recent significant events include:

• Acquisition of Volvo by Ford;
• equity swap joint venture between Fiat and GM;
• the Daimler merger with Chrysler, followed by the integration of Mitsubishi into the group;
• the sale of Rover Group by BMW, with Land Rover going to Ford;
• the Renault-Nissan cross-shareholding, effectively a Renault take-over;
• Volkswagen's take-over of Swedish truck maker Scania.

Recent investments in the UK have occurred:

• Ford/Jaguar at Halewood;
• Peugeot at Ryton; and
• Vauxhall (GM) at Luton and Ellesmere Port for example.

However the problems at Rover Group and continuing concerns over the longer term future of the Ford Dagenham plant illustrate how precariously balanced the industry is.

Future prospects:

Over-capacity often results in over-production, with the ultimate effect of downward pressure on prices.

If the block exemption for car makers - which allows them to have chains of exclusive dealers - is removed in 2002, as seems increasingly likely, then prices for new cars will fall further.

Aggregate over-capacity is not spread evenly across manufacturers, countries or plants.

Rather, it exposes the vulnerable: the oldest plants, the least efficient plants, or simply those producing an unattractive product.

The concern is that high efficiency may not compensate for structural uncompetitiveness for European vehicle production plants.

Going global

Both BMW and Mercedes (now DaimlerChrysler) have invested in major new facilities in North America.

Others, including Audi and General Motors, are investing in countries on the periphery of the European Union - notably Hungary and Poland.

As the industry becomes truly a global concern, so the scope for shifting investment and production grows.

UK industry under pressure

There are counterveiling pressures, not least the need to be geographically near the market in order to improve responsiveness to changing demands, but these may not be sufficient to sustain manufacturing in the European Union in its current form.

Up to 80% of UK output is going abroad

For the UK automotive industry these are pressing concerns.

UK manufacturers have been strongly export-orientated, with much of the growth in production during the 1990s attributable to exports to the European Union.

Investments by Nissan, Honda and then Toyota have been particularly aimed at winning export markets - with up to 80% of output going abroad.

It is indicative of the problems, therefore, that Nissan is reportedly considering the removal of Micra production from Sunderland when the replacement model is introduced.

This despite the fact that the Micra is the highest volume model produced at Sunderland, and the plant has the highest output per head in Europe.