2011 Will Be Little Bit Better, But Not Much
Forced Efficiencies Mean Manufacturers Better Prepared For Downturn
The dreaded double-dip recession is about to engulf the West European car market, as the impact of cash-for-clunkers government subsidies runs out and consumer confidence wilts.
Latest data shows that sales dived more than 18 per cent in October, and experts are scrambling to slash their forecasts for 2011, at least those that are brave enough to risk their reputation on projecting what 2011 might bring.
J.D.Power, in its report for October showing sales dropped 18.3 per cent in Western Europe, also cut its forecast for 2011 for the third month in a row to minus 2.1 per cent, from down 1.8 per cent in September and off 1.4 per cent made in August. There was some goodish news from J.D.Power though. It raised its forecast for 2010 to down 6.1 per cent from down 6.9 per cent suggested in August.
Despite huge amounts of government money which flooded in to support car sales particularly in Germany, the region’s biggest market, Europe is teetering on to the down slope.
“Accelerated sales declines across the region’s major markets with the withdrawal of scrappage and high base levels, in combination with ongoing weak consumer confidence, would appear to indicate that the European passenger car market is entering the double-dip scenario,” said IHS Automotive analyst Tim Urquhart.
Citigroup Global Markets analyst John Lawson agrees.
“In Europe, the current ‘double-dip’ in car sales in the post-incentive hangover is liable to continue in our view through the first half of 2011,” said Lawson.
Premium manufacturers like BMW, Mercedes and Volkswagen’s Audi look like keeping their heads above water without too much trouble. It is the mass-makers that will find conditions torrid, as they scramble to slash prices to keep production lines moving at an economic pace. That includes VW, as well as the French manufacturers Renault and Peugeot-Citroen. According to Lawson, Fiat of Italy is the most notable loser, but it is stabilizing market share at around seven per cent.
Apart from VW, Europe’s remaining mass car makers don’t have booming China to bail them out. Desperation for sales is also leading to some manufacturers using dubious practices like flooding dealerships with unwanted new cars which are registered by dealers and then sold off at second-hand prices.
Fiat Auto, after its third quarter results, is believed to be in the red in Europe, although it is making money in markets like South America. Barclays Capital Research reckons Fiat will lose about €650 million this year in Europe. Big players like Renault and Peugeot-Citroen don’t report profits after the first and third quarters, only at the halfway and year end stage. Ford Europe reported a $196 million operating loss in the third quarter, Toyota was in the red by nearly $170 million in the quarter. GM Europe lost $559 million.
The key to the weak outlook for Europe’s car sales, lies with the economy.
According to IHS real GDP growth is expected to grow by a mediocre 1.0 per cent in 2010, drifting down to 0.8 per cent in 2011. 2012’s plus 1.1 per cent isn’t likely to drive consumers into a buying frenzy.
Usually this scenario would translate into a flood of red ink on balance sheets, but during the severe downturn after 2008 European car manufacturers have been forced to take serious action to boost efficiency. They are much better qualified to ride-out sales downturns now without seeing profits completely decimated.
Neil Winton – November 15, 2010
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