The car industry’s biggest problem can be summed up in two words: chronic overcapacity. Most analysts estimate this at around 10 million cars, or 25% of world output, while the companies themselves reckon it is twice as high: Ford’s Trotman says it is the equivalent to 80 modern car plants lying idle.The problem is most acute in Europe, where the industry has an annual capacity of around 22 million cars but actually made only 16 million last year.There is no improvement in sight, with consultants KPMG saying the world’s carmakers plan to assemble 15 million more cars over the next three years than analysts reckon have buyers.The industry has no option but to slash capacity, but so far the only talk is about building, not closing factories. The sole significant closure was Renault’s Vilvoorde factory near Brussels which shut down in 1997. They may be burdened with unwanted capacity, but European manufacturers can afford to ignore the problem for the moment because they are flush from making the biggest combined profits last year since the peak of 1989.The industry has been awash with rumours of take-overs and mergers since the pioneering DaimlerChrysler deal, with almost every company being paired off with a rival. There has been some action, most notably Fiat’s unsuccessful 13-billion euro offer for the whole of Volvo.There has also been some potential stalking of targets with, for example, Ford and DaimlerChrysler considering a move for Nissan. But the Big Deal predicted after the DaimlerChrysler merger has not materialised – yet. The most obvious merger and take-over scenarios face seemingly insurmountable obstacles. The fact that Renault is 44% state-owned is an effective block to a logical merger with its French rival Peugeot because the government is unlikely to sanction a deal which would lead inevitably to plant closures and massive job losses. Similarly, the 46% stake in BMW held by the fiercely independent Quandt family is a major obstacle to an alliance with a larger company.Europe’s car industry still punches above its weight politically because it is a large-scale employer and symbol of national virility. It can count on government protection, but the Americanising of Jaguar, Volvo and Saab, and the Germanising of Rolls Royce and Rover show that independence is not a permanent option as the global industry braces for a new round of blood-letting.Job losses are certain to follow mergers, because unlike Chrysler and Daimler, most companies have big model overlaps with likely partners, making alliances extremely problematic.Fiat and Volkswagen are being tipped to make the next big move. The Italian carmaker, at times linked with Ford, is looking vulnerable after failing to win Volvo. Germany’s biggest auto manufacturer is the European market leader and a leading player in Latin America, but with its relative weakness in North America and an Asian presence largely limited to China, it is not a global operator.Meanwhile, industry-watchers have honed their long-term survival list to six firms from three continents: General Motors, Ford, Volkswagen, DaimlerChrysler, Toyota and Honda. But now, less than six months before it expires, the Union’s most blatantly protectionist measure, which capped Japan’s market share below 12%, is simply not an issue any more.The industry has undergone seismic upheavals since European and US car makers bullied Brussels into shielding them from the Japanese ‘menace’ when the Union’s single market was launched in 1993. And among the most dramatic changes is the humbling of the once powerful Japanese car industry which spread so much fear in Europe and the US in the 1980s and early 1990s.The sheer depth of the changes is highlighted by the stellar performance of Renault. The French group was among the most vociferous supporters of import controls and the most hotly tipped candidate for collapse or take-over back in the late 1980s. In March this year, it stunned the industry by paying 5.5 billion euro for a 35% stake in struggling Nissan, Japan’s second-largest carmaker, partly financed by its record profits of 1.34 billion euro in 1998. France, which bitterly denounced the UK as supplying a Trojan Horse for the Japanese by allowing them to set up car factories on its soil, will also soon celebrate the opening of a giant Toyota plant close to the Belgian border – the first major Japanese car manufacturing investment on the continent.The Japanese industry is on the ropes. Nissan’s debts exceed 36 billion euro and Mitsubishi Motors is seeking a foreign partner to help it return to profitability after domestic sales crashed by 15% last year.Europe’s carmakers, by contrast, are on a roll, the industry finally matching the global reach of its American rivals with Daimler’s breathtaking 91-billion euro merger with Chrysler in May 1998. Volkswagen has consolidated its position as European market leader, turned Skoda – the Czech manufacturer which was once the butt of industry jokes – into a model of efficiency, and established itself in the luxury car market with the successful Audi marque. BMW scored a coup by acquiring Rolls Royce and is now trying to turn round its second, more troubled British acquisition, Rover.Yet Europe’s car business is facing a massive shake-up which will dwarf the consolidation of the past decade. Ford chairman Alex Trotman reckons that only five or six of the world’s 20 top car manufacturers will still be around in ten years. One disappeared this year with Volvo’s sale of its car division to Ford for around 6.5 billion euro.Volvo has been top of most analysts’ take-over tip list for a couple of years, but the suddenness of the sale earlier this year and the muted political opposition to the loss of a national icon underscored the changes convulsing not just the auto business but the entire European business establishment.Only six years ago, bowing to shareholder and popular protests, Volvo torpedoed a planned merger with Renault. Today, Volvo and Jaguar have to be American and Rolls Royce German to survive.