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Despite Bleak Outlook, Manufacturers Holding On Grimly

Paris Show CEOs Forecast More Of The Same For 2011
“the risk of a double dip recession certainly cannot be overlooked”

Prospects for car sales in Europe look to be remarkably resilient when you consider that most car scrapping subsidy schemes are on their last legs, economic prospects look shaky for many, and European governments are slashing and burning their spending plans.

European consumers, worried about jobs, can be forgiven if they close their wallets for a while and concentrate on making provision for basic necessities rather than splurging on a gleaming new car. After all, most cars nowadays will generate a positive nod if their owners say “will it get me through one more year?”

The chief executives of Europe’s most important mass car manufacturers travelled to the Paris Car Show, which closed to the public on October 17, and left a distinctly downbeat message. Renault CEO Carlos Ghosn said Western Europe’s sales would fall two per cent next year. Ford of Europe CEO Stephen Odell looked for a slow turnaround, but was worried that austerity measures might tip over the apple cart in some markets, which he didn’t specify. Fiat CEO Sergio Marchionne reckoned 2011 would at least not be any worse than this year, with sales around 12.5 million. But at the show, Marchionne confirmed Fiat was delaying the launch of the new Panda until January 2012, after being delayed already from the middle of 2010, and September 2011.

“Launching new products in a market that is so structurally weak makes no sense. We are saving our ammunition for a recovery,” Marchionne said.

Deutsche Bank said automakers expect European demand to improve modestly in 2011, but if sales fall around the expected seven per cent in 2010, a modest recovery suggests a level slightly less than this year’s is likely in 2011.

Forecaster J.D.Power in its report saying sales in Western Europe fell 10.4 per cent in September, improved its forecast for 2010 to a decline of 6.4 per cent, after predicting a nearly seven per cent fall the previous month, but changed its forecast for 2011 to minus 1.8 per cent from minus 1.4 per cent.

J.D.Power analyst Jonathon Poskitt still worries that the dreaded double-dip recession might rear its ugly head and derail all these modest predictions.

“We do not expect that 2011 will beat the 2010 market either. The reason is that while the underlying economic drivers for car demand should continue to pick up next year under our base case scenario, the 2011 full year market will be comparing to a 2010 market that still had incentive inflation in the first half. Uncertainty continues over the impact of the austerity measures now being adopted by European governments and ongoing sovereign debt worries; the risk of a double dip recession certainly cannot be overlooked,” Poskitt said.

Ranjit Unnithan, auto analyst with J.P.Morgan, doesn’t seem to have been exposed to this gloomy talk in Paris, and is moderately bullish about the future. He doesn’t see any great upturn, but thinks the car companies are now able to manage their way through these difficult times.

Pleasantly surprised
“We returned from the Paris auto show pleasantly surprised by the optimism displayed by several manufacturers and suppliers about the future. Our conversations suggest this optimism is not driven by prospects of a rapid cyclical recovery in developed markets – many companies in fact expect Europe to be flat in 2011 – but by greater self-belief on the part of management teams in dealing with depressed economic conditions,” Unnithan said.

“If 2010 provides any guide, then the 2011 outlook may in fact be too cautious. Pricing has held up better than expectations in 2010 largely due to tight inventory discipline. We see no reason why this cannot continue in 2011. Cyclical concerns seem overly cautious given that Western Europe sales levels are already 13 per cent below pre-crisis 2007 levels, suggesting more upside from current levels rather than downside,” he said.

Neil Winton – October 15, 2010

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