By William Boston 

BERLIN -- After reopening factories and sorting out supply chains, Europe's car makers are facing a new problem related to the coronavirus pandemic: a glut of unsold cars.

New-car sales in the European Union, in its affiliate free-trade association partners and in the U.K. fell 57% in May from a year earlier to 623,812 vehicles, according to data published Wednesday by the European Automobile Manufacturers' Association.

Each of the 27 EU member states reported double-digit-percentage declines in new-car sales, and the U.K. was down 89% from a year earlier. The data marked a small improvement following steeper drops in March and April, but new-car sales across the region remain far below last year's.

Production is still well below precrisis levels, but with such comatose demand even this reduced output is creating a surplus of new cars, producing a bottleneck that is slowing down the industry's recovery and threatening jobs and profits.

European executives say they are concerned that while China's automotive industry is snapping back and the U.S. sector looks as though it could follow suit, Europe's recovery might take longer because of oversupply and government incentives designed to boost the small electric-car market.

Industry analysts and European car dealers estimate that unsold cars on dealer lots are at least 30% above normal, preventing dealers from ordering new vehicles from manufacturers. Before production can fully recover, dealers will have to sell millions of older vehicles.

"Unsold stocks are climbing, and on the other hand vehicles are not leaving the lots," said Antje Woltermann, managing director of the ZDK industry group, representing Germany's car dealers and repair shops, adding that unsold inventory in Germany alone was about EUR15 billion ($17 billion).

While Europe continues to fall, China's auto market is posting gains. Volkswagen AG, the world's largest auto maker by sales and the largest foreign car manufacturer in China, reported steep declines in sales everywhere in the world except China last month, where it posted a 6% increase in sales.

"The return of these kinds of figures is encouraging and gives us continued cautious optimism going forward," Stephan Wöllenstein, chief executive of Volkswagen Group China, said in a statement.

Countries such as France and Germany, two of the biggest auto markets in Europe, have approved billions of euros in cash incentives to encourage consumers to buy cars. But while France is supporting purchases of both conventional and electric cars, Germany is focusing on electric and hybrid vehicles, doing nothing to help address the glut of unsold gasoline and diesel cars.

The market for plug-in electric vehicles remains a niche, accounting for about 7% of EU new-car sales in the first quarter, or 167,132 vehicles, according to the European manufacturers' group.

The recent decisions regarding cash incentives marked a rare lobbying setback for an industry that had pushed for conventional cars to benefit from the measures. Auto executives had argued that replacing older diesel and gasoline cars with new, less-polluting models would benefit the environment.

"There is a disconnection between the incentives and what is needed," said Stefano Aversa, vice chairman of AlixPartners, a consulting firm. "Governments are not being pragmatic; it's a bit ideological."

Write to William Boston at william.boston@wsj.com

(END) Dow Jones Newswires

June 17, 2020 02:14 ET (06:14 GMT)