Geneva Hype Can’t Hide Dire Prospects For Europe In 2010

“In a worst case scenario, highest retail exposure companies like Peugeot-Citroen and Renault of France and Fiat would suffer most”

Europe’s car manufacturers were putting on a brave face as they unveiled their latest automotive creations at the annual Geneva car show, but with economic prospects at best anaemic and government subsidies running out, sales prospects look bleak for 2010.

There was no particularly exciting new car in Geneva which might stop the traffic, but if there was a discernible technological theme, it was the attempt, often with a shade of desperation, to demonstrate green credentials. Probably the most risible attempt came from Italian supercar maker Ferrari with its first hybrid sports car. The 599 GTB Fiorano appeared with a concept hybrid power train, and the Italian sports car maker said in four years all Ferraris will be available with a hybrid option. Almost as shocking was the Porsche Cayenne SUV hybrid and diesel, unveiled as the first green Porsches. They’ll now just be gulping down fuel, rather than swilling it.

Most new cars were variations on a traditional theme, led by BMW’s new understated 5-Series. The previous model had offended many traditional buyers with its in-yer-face design. Kia’s beautiful new Sportage small SUV underlined the Asian threat to Europe, backed up by deal-clinching 7-year, 100,000 mile guarantees. The Koreans were a big threat when they just sold cheap, cheerful and reliable econo boxes. Now they have charismatic-looking automobiles backed by unprecedented warranties.

Pretty Giulietta
Fiat of Italy’s Alfa Romeo unveiled the pretty little Giulietta. Volkswagen’s Audi showed the little A1, which uses much engineering already seen in the VW Polo.

The shape of things to come was signalled by GM Europe CEO Nick Reilly, who drove the Opel Ampera extended range electric vehicle the 300 odd miles from the company’s German headquarters to Geneva on one tank of fuel

The Ampera can go about 40 miles on battery power and has a total range of at least 300 miles with the gasoline engine generating electricity to power the electric motor when the battery runs dry. The Ampera goes on sale in 2011.

Dangerously weak
But dangerously weak sales prospects were focussing minds and threatening the industry’s health, after the gritted teeth and forced smiles of the launch presentations.

According to investment bank Credit Suisse, there is a threatening convergence of three bits of bad news which will bring what it calls a Triple witching year, and is forcing manufacturers to slash European sales forecasts for 2010 from a fall of about 10 per cent at the start of the year, to more like a dive of 16 per cent.

“In investment parlance, “triple witching” is defined as the simultaneous expiration of three investment contracts, often causing increased volatility. For the European auto sector, this looks to an apt analogy in 2010 as:

·      Expiry of state financed scrappage schemes look set to coincide with:

·      An end to cheap money as credit spreads widen, while:

·      Taxation is on the rise, both on income and VAT (sales tax).

“The impact on European auto demand could thus be very negative, and some companies are already guiding for declines that would rival the worst in recorded history,” said Credit Suisse analyst Stuart Pearson in a report.

Pearson said, in a section headed “What happens if volumes collapse?” that if sales fall 16 per cent, the retail section would slide by 31 per cent compared with the earlier projection of a 24 per cent fall, while the expected improvement in fleet sales would slow to 13 per cent from a 21 per cent gain.

In this worst case scenario, manufacturers with highest retail exposure like Peugeot-Citroen and Renault of France and Fiat would suffer most. German upscale manufacturers BMW and Mercedes would ring up modest sales increases. Both Germans could only watch last year as mass carmakers’ sales in Germany in particular and France, Italy and Britain to a lesser degree, saw sales zoom ahead because of the government scrapping subsidy schemes. But the net effect of these schemes was probably to not only steal sales from 2010, but also to make sure that most car sales were of the cheapest, less profitable cars.

Before the latest, lower sales estimates, Europe had been expecting a 10 per cent fall in 2010, while German sales were projected at about one-third lower or around one million down on 2009.

Less than torrid
The European Union now says 2010 GDP growth in Europe will, at best, be a less than torrid 0.7 per cent.

Manufacturers might be looking at the sales prospects of individual models through rose-tinted spectacles, but hard hearted realism was to the fore when looking at overall market prospects.

“A few weeks ago we expected a European car market down 10 per cent. This assumed an economic upturn. But the information we now have is not as good as two to three months ago,” Renault Chief Operating Officer Patrick Pelata said on the eve of the show.

Volkswagen CEO Martin Winterkorn said 2010 would not be an easy year in Europe, although he saw positive tailwinds in the U.S. and China.

Fiat-Chrysler CEO Sergio Marchionne agreed with Credit Suisse that European sales might dive 16 per cent in 2010, because of the ending of government subsidies.

Marchionne also hinted that the decision next month on the future of Alfa Romeo would also address the long-mooted idea that the Fiat Group might spin off the automotive businesses into a separate quoted company.

“Let’s talk about it on April 21,” said Marchionne when asked about an auto spinoff.

Whither Ferrari, Maserati?
A spinoff would include Chrysler, in which Fiat has a 20 per cent stake, and presumably Lancia and Alfa Romeo, if the latter was deemed worthy of rescue. That would leave Iveco trucks, and the agriculture subsidiary CNH remaining in the Fiat Group. It’s not clear what would happen to Fiat’s supercar makers Ferrari and Maserati.

The Fiat news is expected to follow an investor’s day in Turin, Italy on April 21.