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Europe Car Sales Will Slow, But Profits Will Benefit From Cost Cuts

“combined operating margin will increase to more than six per cent in 2015, from 5.6 per cent in 2014”

Europe car sales growth will slow next year, but profits will improve as restructuring benefits kick-in, according to a report from Fitch Ratings.

Fitch said sales growth in Europe will slow to between three and four per cent next year, after rebounding in 2014 by 4.5 to five per cent. This year was the first positive year for car sales since 2008.

Car sales in the European Union (E.U.) rose 6.5 per cent in October to 1.07 million compared with the same month of 2013, to bring sales 6.1 per cent higher at 10.65 million for the 10 months, according to the European Auto Manufacturers Association, known by its French acronym ACEA.

IHS Auto expects 2014 sales to hit 12.5 million, for a 5.2 per cent growth on the year. But this is still some three million below the peak years of the last decade.

“While we expect demand to continue to grow for the coming years, by the end of the decade it will still only have reached around 14.3 million, still over one million below where it once was,” IHS Auto analyst Carlos Da Silva said.

Fitch said plant closures and cost savings are paying off.

“This should offset the fierce competition and continuous price pressure globally and the remaining production overcapacity in Europe. We expect the European sector’s combined operating margin to increase to more than six per cent in 2015, from 5.6 per cent in 2014 and five per cent in 2013. In particular, we do not expect any manufacturer to post operating losses in 2015,” Fitch analyst Emmanuel Bulle said in the report.

There are some clouds on the horizon though.

“Nonetheless, we believe that the recovery remains fragile and that sales growth will remain uneven in the region. A lack of clear and sustained economic recovery continues to hinder demand for new vehicles in Europe. Longer term, we remain cautious about the ability of new car sales to return to their pre-crisis levels, because of social and structures factors,” Bulle said.

Lower levels
IHS Auto’s Da Silva also has doubts, saying the current level of sales in Europe, although improving, is still at much lower levels than is good for the financial health of manufacturers.

“The European market is still only in recuperation mode. It is far from cruising at normal speed yet. The European recovery is happening in a very delicate context, one that still requires a fair share of artificial support, such as through the rental market and incentives. It seems the patient is doing better, but still cannot do without any medication,” he said.

Worst in 20 years
Europe is recovering from the worst sales crisis in twenty years and six years of consecutive declines. Demand has been supported by government subsidies, while manufacturers have used heavy discounting to move bloated stocks. In the U.S. the problem of overcapacity was solved by shutting down capacity, with a little bit of help from the federal government. Since 2009, about 17 U.S. factories closed.

Not so in Europe, where overcapacity has been chipped away, rather than slashed. This might be an advantage when demand returns.

“The current low capacity utilisation points to a potential strong improvement in profitability through operating leverage if sales continue to increase. This will compound the progress made to streamline manufacturers’ cost structures,” Fitch’s Bulle said.

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