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Euro Collapse Could Mean The $30,000/£20,000 Smart Car

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Euro Collapse Could Mean The $30,000/£20,000 Smart Car

“If Germany is ever to re-establish “real money”, German manufacturer margins would be reported in Deutschmarks, but would collapse.”

The nightmare for Germany’s premium car manufacturers is that Europe’s financial crisis kills the euro single currency zone and forces a return to its traditional currency the deutschmark, pricing their cars out of markets like the U.S. and Britain, and destroying profits.

According to a report from Bernstein Research in London, if the deutschmark was reinstated, it would be worth anything from 20 to 80 per cent more than the euro, and would wipe out profit margins for the likes of BMW, Audi, Mercedes and Porsche.

“Does anyone in New York or London fancy a (Mercedes) Smart car for $30,000 or £20,000,” said Bernstein analyst Max Warburton.

Prices for the Smart ForTwo now start at just over $13,000 in America before tax and £9,600 in Britain after tax. Imagine what this would do to sales of the new BMW 3 series, the Mercedes E class or Audi A6.

Bernstein says there are three possible outcomes to the euro debt crisis, two of which would be helpful to the Germans. The positive scenarios are the euro stumbling on and staying afloat, without much action from the European Central Bank (ECB). The second positive turn of events would be a decision to print money by the ECB. This might save the euro, but at the risk of renewed inflation. Both these scenarios point to a weakening of the euro against the dollar, which would help the Germans in export markets like the U.S.

Watch out if the euro fails and the Deutschmark returns.

“We have seen various commentators estimate that the “correct” value of the Deutschmark is between 20 per cent and 80 per cent higher than the effective euro rate. If Germany is ever to re-establish ……… “real money”, German manufacturers’ margins would be reported in Deutschmarks, but would collapse. While they have some pricing power, they couldn’t raise prices enough in export markets to compensate,” Warburton said.

Warburton points out that even though a return to the Deutschmark would be devastating, the Germans have in fact made big efforts to diversify production around the world to cut down on foreign exchange risk. For BMW almost half of their U.S. sales are produced in the U.S., with all X3 and X5 SUVs made locally for global sale. Mini output in Britain helps there. Mercedes is at about 40 per cent, with M class and G class SUVs made in the U.S. and C-class production starting next year. VW builds in Mexico and is ramping up output at the new Tennessee plant.

And whenever a political crisis looms with a threat of disaster as one option, the outcome always seems to be the boring one rather than the apocalypse.

“If Europe muddles through, do we get a lower euro? Could we end up with a scenario that is actually quite positive for the German industry? If the Germans agree to change the ECB’s remit and agree to print money, might we see a falling Euro? Such a scenario could be rather beneficial for the Germans – a lower Euro could take export margins even higher,” Warburton said.

The German auto makers haven’t got where they are today by muddling through, but that outcome would suit them just fine.


Neil Winton – December 1, 2011

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