“Self registrations, heavy discounting and other incentives are a significant concern, and distort the true level of demand”
Car sales in Western Europe continued to recover from the depths of the recession in the first half of 2014, but investors in mass car manufacturers won’t be cheering too loudly because the improvement relied too much on expensive incentives to help bottom lines.
German premium players raised sales too, but without having to cut prices too much.
Underlying problems like excess capacity remain unsolved and will bring weaker mass market players in the industry down over the longer term if not rectified.
Car sales in Western Europe rose 5.5 per cent in the first half of 2014 to 6.4 million compared with the same period of 2013, according to the European Car Manufacturers Association, known by its French acronym ACEA. In June sales growth slowed a bit to 3.7 per cent, to 1.2 million.
Peter Fuss, partner in the industry consultancy EY, said the 10th consecutive month of higher sales was down to improved consumer confidence, and a slew of attractive new models.
One report said incentives in the period in Europe’s top five markets increased 10 per cent to a record $3,700 a vehicle.
“Self registrations, heavy discounting and other incentives for buyers remain a significant area of concern, as they continue to distort the true level of demand,” Fuss said.
Self registration refers to the practise of dealers buying their own cars to make sure they reach manufacturers’ sales targets. These cars are then finally resold to the public at prices much lower than the sticker.
The perennial problem of over-capacity isn’t going away.
“In terms of production capacity, volume carmakers in Europe continue to suffer from excess capacity and are gradually implanting plant shutdowns. On the other hand, the output and utilization rate for luxury car manufacturers (like BMW, Mercedes and VW’s Audi) continue to be strong, on the back of a robust export demand,” Fuss said.
In remarks made earlier in the month at a press conference in Detroit, Ford Europe President Stephen Odell said Europe’s underlying economic performance remained weak, and it hadn’t recovered as strongly as other parts of the world.
Ford Europe has led other manufacturers in taking hard action to slash excess output.
“We still have a market with 20 million units of capacity and about 14 million sales,” Odell was quoted as saying.
The EuroTaxGlass’s consultancy said in a report that European plants need a production level of between 80 and 85 per cent of capacity to breakeven.
“European plants will struggle to get above 70 per cent maximum capacity by the end of this year. Production continues to outstrip registrations by around 3.5 per cent per year, putting further pressure on (manufacturers) to turn metal back into cash,” EuroTaxGlass’s said.
IHS Automotive was also cautious about the implications of the higher sales figures.
“Europe is definitely in recovery mode and will keep growing, no doubt. We just caution there is more to it than the current figures might suggest,” IHS Automotive analyst Carlos Da Silva said.
“The absolute level of European sales remains historically low. And this comes despite sales being fed by massive renewal needs and a very high level of discounts in most countries. Car sales are increasing in quantity, though maybe not in quality, or profitability for manufacturers. That is a major reason for concern,” Da Silva said.
EY’s Fuss said he expects the growth to continue for the rest of the year, ending with a three to five per cent increase in sales, but that’s the extent of the good news.
“we anticipate discounts and self-registrations to decline gradually, as economic fundamentals improve and the replacement cycle returns to normalcy. From a longer-term perspective, it seems unlikely for the market to reach its pre-crisis level even by the end of this decade, due to shifting customer preferences from car ownership to access, declining interest of the youth in cars, and several large cities or countries taking measures to deter car usage,” Fuss said.
Germany’s VW retained its lead as market leader in the first half with a share of 24.6 per cent and 1.57 million sales. Stand out performer was Renault of France, up 18.4 per cent to 608,900. Financially struggling GM Europe’s Opel-Vauxhall raised its sales 6.9 per cent to 443,400, while its Chevrolet subsidiary’s sales plunged more than 50 per cent to just under 30,000. GM is pulling Chevrolet out of Europe in 2015.
Of the smaller competitors, Mitsubishi of Japan raised sales 16.5 per cent to just over 41,000, mainly on the back of the success of its Outlander plug-in hybrid SUV.