The European auto industry needs to cut its capacity by 10 to 20 percent in response to slack consumer demand that will likely continue through 2014, according to Fiat chief Sergio Marchionne.
"If volumes stay where they are, I think if you took out 10 to 15 percent of the capacity, maybe 20 percent of the capacity in Europe," automakers will reach a sustainable level of production, Marchionne told reporters on Wednesday.
Asked what his forecast is for European vehicle demand, Marchionne said he expects it to "stay flat through 2014."
Such dramatic capacity reduction -- which would require mass layoffs at a time when Europe is reeling from economic turmoil and has not yet resolved its crippling government debt problems -- will be very difficult to achieve, he said.
"It's a tough discussion," Marchionne said on the sidelines of the Automotive News World Congress in Detroit.
"I guarantee you're going to have some very negative reactions from industrial European countries to my suggestion."
Fiat's Italian plants are currently operating at less than 60 percent capacity, a situation Marchionne said is untenable and is mirrored at other European automakers.
The Italian automaker reached a "historic" agreement with its labor unions last month which allowed Fiat to bring production of the Panda back to Italy from Poland.
"If the commitment is made by the trade unions and if we are given an opportunity to effectively develop manufacturing infrastructure to the point where it can be competitive against international competitors ,then I think we will continue to do that," Marchionne told the conference.
"If they keep on blocking the process -- and I hope they do not -- then I think Fiat will have no choice but to prepare reduce its footprint. It's for its own survival. We have zero choice."
Europe is at a turning point where it must decide whether it will "maintain a viable manufacturing industry or not," he said.
The United States was willing to shut unproductive plants and lay off hundreds of thousands of workers in order to save its now profitable auto industry.
European politicians, however, provided bridge funding in the midst of the 2008-09 crisis only if automakers agreed not to slash jobs.
That created an unbalanced playing field and an unprofitable manufacturing base, he said.
Shuttering plants won't be enough to solve the problem, he said, adding that consolidation of the industry is also necessary.
"I would be lying to you if I told you that any combination in Europe would not be incredibly gutsy," Marchionne said.
"There would be a whole pile of resistance from people with vested interests in maintaining positions that currently exist regardless of economic stand-alone viability."
While Marchionne has said he is looking to expand the Fiat-Chrysler alliance in the near future, he showed a significant lack of enthusiasm for a European partner.
Asked about a possible tie-up with GM's Opel -- which Fiat had tried to acquire as General Motors headed into a government-backed bankruptcy -- he said "if you were to cash in your chips to buy Opel you wouldn't get much."
He also slapped down rumors of a possible tied-up with France's PSA Peugeot-Citroen.
"I laid out a problem on the European side -- it needs to be solved," he said in response to a reporter's question on the topic. "All this capacity, chasing that volume is going to create fundamental destructive forces in the marketplace.
"There are some levels of sales now that I would not touch. I would refuse to engage. You're not even recovering variable cost."