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Europe Bottoms Out, But Bloated Industry Needs To Slash To Survive

Europe Bottoms Out, But Bloated Industry Needs To Slash To Survive.

“The fact remains the Western European auto market is in deep crisis”

Europe’s carmakers look like avoiding the worst predictions of coronavirus disaster, but that won’t avoid severe pain in the industry because it has too many factories and workers and needs cuts to survive.

A couple of months ago auto sales were in free fall. Then, consultants Alix Partners forecast a 32% fall in Europe this year to 14.1 million cars and SUVs, while LMC Automotive went for down 25%. Latest forecasts suggest the worst is over for sales, although worries about a second coronavirus cast doubts. 

LMC Automotive, in its latest forecast, expects Western Europe sales to be a little better in all of 2020, at minus 24%. That might not seem much, but until recently forecasts were getting worse every time as the industry crossed its fingers that the bottom might be sight.

Alix Partners hasn’t updated its forecast yet.

Western Europe includes all the big markets like Germany, France, Britain, Italy and Spain.

LMC Automotive said Western Europe’s sales in July fell only by 2.2% compared with the same month last year, as lockdown restrictions eased and government incentive schemes kicked in. In July, sales in France rose 3.9% after its lone positive performance the previous month, British sales jumped 11.3%, but Germany, Europe’s biggest market fell 5.4%.

LMC had some cautionary thoughts though.

“The fact remains the Western European auto market is in deep crisis. The region currently sits 35% below last year’s result. We expect this figure to improve through the second half, as consumer confidence picks up, spurred on by further government support. Our 2020 outlook for the region continues to see a major contraction, at -24%, only slightly better than we projected last month,” it said in a report.

Chronic overcapacity
Germany’s Center for Automotive Research (CAR) reckons the fall will stop at minus 25%, but this will still cause big problems anyway because of the region’s chronic overcapacity. Costs are too high and big losses are likely to become endemic unless there are plant closures and job losses

“Long periods of loss cannot be afforded in the highly competitive car market,” CAR said in a report.

“In the next 12 to 18 months, we believe that there will be a large reduction in capacity in the European auto industry. For Germany, we expect job cuts due to capacity adjustments of 100,000 jobs,” CAR said.

In a report in late July the European Automobile Manufacturers Association, known by its French acronym ACEA, called on the European Union (EU) and its component nations to step up political, economic and practical support to help the industry weather the storm. It pointed out that auto industry sales account for over 7% of total EU GDP.

Last month Mitsubishi of Japan, a member of the Renault Nissan Alliance, said it was pulling out of Europe. That prompted thoughts that other smaller foreign operators in Europe, like Mazda and Subaru, might be considering their futures. Meanwhile the merger between Groupe PSA and Fiat Chrysler looks like being completed by early next year, with Fiat’s European operations coming under the spotlight. Cost cutting will definitely be the first item on the agenda.

   French consultancy Inovev has three scenarios for 2020, with sales of minus 25% being its favored prediction, although it does have two extra worse theories, one in which the promised government aid somehow gets glued up, minus 30%, and the most pessimistic view, down 35%, if support dries up and there is a second wave of coronavirus.   

LMC Automotive has a similar caveat.

Serious downside risk
“With the virus still in circulation, the serious downside risk of further Covid-19 outbreaks remain. Any localized spikes will undoubtedly require some form of containment measures, which would act as a headwind to ongoing recovery in the region. Delays in registering sales, as well as the pent-up demand built from previous months, continue to distort the latest figures, making it difficult to determine the true underlying level of market demand currently. Even so, the region is certainly seeing signs of improvement,” LMC said. 

It’s hard to believe 5 months ago forecasters were hoping auto sales in Europe might slip only about 5% in 2020, but as the virus impact accelerated shutdowns, forecasters were forced into more pessimistic positions.

Meanwhile, as the industry gasps for air, there will be one big winner; the car buyer. Carmakers need to get rid of excess stocks and sustain dealerships and suppliers, and will be desperate to unload cars and SUVs.


 

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