Euro Storm Doesn’t Help Confidence, And Long-Term Trends A Worry
Will Governments Intervene?
“we may be witnessing permanently lower demand if society’s appetite for motorisation is shrinking”
As the automotive industry heads back to work from beaches and holiday homes, a second European recession in three years looms and forecasters are busy crossing out their old predictions and substituting new, worse ones.
Even optimists hoping to ride out the storm before normality returns are likely to be nervously watching the euro financial crisis rumbling on. A euro zone break-up promises an uncharted and dangerous outcome that is impossible to predict.
Latest data from euro zone purchasing managers predicted a second three months in succession of negative economic activity in the third quarter, the accepted definition of a recession. Euro zone GDP slipped 0.7 per cent in the second quarter.
Consultants Alix Partners reckons Western Europe’s car sales won’t return to pre-crisis highs until the end of the decade.
“Industry sales are unlikely to reach 16 million again before 2020, Alix Partners said in a report.
LMC Automotive said 2012 Western Europe car sales will fall 7.2 per cent to 11.9 million. Others are predicting a fall of at least eight per cent.
Professor Ferdinand Dudenhoeffer of the Center for Automotive Research (CAR) at Germany’s University of Duisberg-Essen, is a bit more optimistic, predicting a fall of 5.4 per cent in 2012 and another decline of 1.8 per cent in 2013, before a rebound of 3.0 per cent in 2014 and 2.6 per cent in 2015.
Citi Research though came up with a seriously ominous question, wondering if this downturn will become permanent as younger generations fall out of love with the automobile.
“The concern is that we may be witnessing permanently lower demand if society’s appetite for motorisation is shrinking. So far, European vehicle density has only briefly shrunk, but the U.S. is in its fourth year of decline,” Citi Research said in a report.
Struggle
“Europe may struggle to exceed 15 million sales rates of 2004-2007, just as the U.S. may struggle to ever reach 17 million again,” the report said.
The parlous state of Europe’s non-German car manufacturers has led to speculation that a U.S.-style bailout might be imminent. In 2008/2009 the U.S. government saved General Motors and Chrysler with about $34 billion of taxpayers’ money. That kind of money is unlikely to be available for any European restructuring.
Manufacturers are being forced to cut output. Peugeot-Citroen has announced 8,000 redundancies in Europe and said it planned to close a car plant near Paris in 2014. GM’s Opel will halt output at two plants in Germany. Fiat, Volvo and Ford have announced cutbacks.
Professor David Bailey of the Coventry University Business School expects the French government to intervene to support its car industry by reintroducing scrapping subsidies or other protective measures.
Will we see a U.S.-style government funded rescue plan?
“That’s unlikely because there simply isn’t the money in government budgets to support industry. Quite whether these current problems will produce massive restructuring I don’t know. We’ve been here before and industry and government have muddled through, but there might be more restructuring than we’ve seen before. Peugeot-Citroen and Fiat are the most vulnerable. Renault seems to just about be breaking even. Basically, the entire European industry will be affected, although the Germans are weathering it with the big profits and other operations across the world,” Bailey said.
According to CAR’s Dudenhoeffer, amongst all this mayhem, VW is emerging as a big winner.
VW Wins
“One of the major crisis winners is the VW group, which now has about 25 per cent of the market. After the crisis, this could move up to perhaps 30 per cent. The VW group is already twice as large as second-placed Peugeot-Citroen’s 12 per cent,” Dudenhoeffer said.
Despite its dominant position, VW and its compatriots face some risks if the euro crisis unwinds with some harsh consequences for Germany. Germany’s use of the euro currency gives its exporters a huge export price boost. If the euro unravelled and Germany reverted to its old currency the mark, this would torpedo exports.
According to Bailey, the euro crisis is likely to be concluded by one of two outcomes, both of which seem unacceptable now.
“Either the euro zone breaks up in some way, or to hold it together Germany allows the European Central Bank to buy bonds of indebted countries, and instigate a single budget for Europe with stricter controls on national spending. Germany doesn’t wasn’t to see a breakup of the eurozone because this would lead to a 30 per cent appreciation of their currency,” Bailey said.
“Both seem very unlikely, but one of them is going to happen,” Bailey said.
Neil Winton – September 3, 2012
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