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Europe Outlook Dull As Incentive End Clouds Forecasts

Recession Looks Mild By Historical Standards
Opportunity To Tackle Overcapacity Spurned, So Far

European car sales will slide at a slightly quicker rate in 2010, but forecasters are confused about the impact of the ending of government subsidised car scrapping schemes.

One key ingredient missing from the current dip in car sales is any sign of tough action to cut overcapacity in Europe, said by many to be about 20 per cent of the total.

And Deutsche Bank thinks Western Europe’s sales will be more or less stable this year at 13.5 million, and this would mean that in the current crisis from 2008, sales would only have dropped eight per cent, significantly more moderate than previous downturns of 18 per cent in 1974-1975, and the 18 per cent slump in 2003.

“This good performance in 2009 is exclusively attributable to government incentives which we estimate as having a net positive impact on car demand of 1.8 million units,” Deutsche Bank said.

Deutsche Bank remained silent however on what might happen in 2010.

IHS Global Insight projects that sales in 28 European markets will drop four per cent in 2009 to 14.2 million, and the downward momentum will accelerate to nine per cent in 2010 with sales falling to 12.9 million.

U.S. agency Fitch Ratings forecasts that Western European sales will fall by six to eight per cent in 2010, after slipping five per cent in 2009, and talks about next year being a transitional one.

Cloudy impact
Fitch Senior Director Emmanuel Bulle said 2010’s outcome is clouded by differing interpretations of the impact of scrapping incentives.

“Fitch expects a slow and gradual recovery in operating performance trends from 2010 but this will depend to a large extent on sales developments when most scrapping incentive schemes in Europe and other regions expire,” Paris-based Bulle said.

Some forecasters say these incentives have bought forward sales from 2010 to 2009. Next year’s sales will simply be lower by the same amount they increased in 2009. Others reckon that new buyers may have been seduced into the market for new cars because traditionally, owners of old cars purchased newer second hand cars. The carrot of up to €2,000 towards a new car in Germany, plus more generous incentives from dealers, bought these buyers into the new section for the first time. Some forecasters say German sales in 2010 could dive by up to one million.

Sales brought forward or not
Bulle says the jury is still out.

“There is still a high degree of uncertainty about the extent of sales that are bought forward into 2009 from 2010 and the deterioration in product mix as a result of these schemes; the sustainability of economic recovery; and the improvement in consumer and corporate confidence,” Bulle said.

Bull also pointed to the lack of action to take out excess capacity.

“This recession did not lead to the material cut in assembly capacity and the industry consolidation that was anticipated at the star of the crisis, notably because of social and political issues. Fitch expects the previous trend of selective alliances and agreements to continue in 2010 as well as discreet and gradual reductions in capacity and workforce, which are necessary to support a leaner cost structure that is more in line with reduced sales expectations,” Bulle said.

Renault-Nissan CEO Carlos Ghosn reckons European economic growth will be anaemic in 2010 and for several years afterwards, but he believed governments were ready to step in if a double dip recession was looming. Ghosn said consolidation among car makers would not go down the traditional route of traditional mergers and acquisitions, but would involve less formal ways to pool resources and partner for technology development. But he didn’t rule out the possibility of company failures.

Fewer players?
“The global industry may not be able to continue with the same number of players,” Ghosn said, quoted by the investment bank Merrill Lynch.

Bulle didn’t seem to think any major European players were in imminent demise mode, but wasn’t raving about the condition of even the strongest players like Volkswagen. Investors wouldn’t be impressed by Renault’s substantial debt, Peugeot and Daimler would be tainted by low profitability, while Fiat would be hit by weakness in trucks, agricultural and construction equipment industries. Volkswagen’s financial position had deteriorated because of its planned acquisition of Porsche.

Neil Winton – December 1, 2009

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