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Frankfurt Show Hype Will Soon Succumb To Market Reality


Crisis? What Crisis? One Million Fewer German Sales Might Qualify
Renault Battery Gamble Likely To Stumble Over Cost, Practicalities
Huge Electric, CO2 Investment Means Only The Strongest Survive

Now that the Frankfurt Car Show has closed its doors for another two years and the German election is over, you can expect hyperbole to give way to reality.

You could be forgiven for thinking, after a stroll around the Frankfurt show, that the market was about to be inundated with silent, weird-looking little battery vehicles that would save the planet. That might well be the case in, say, 10 years time, but there’s a looming crisis to be survived first which could see German sales dive by up to one million in 2010. That’s almost 30 per cent.

European governments have saved the market from short-term oblivion with their clunker-scrapping incentive schemes. But some experts predict that pay-back day for Europe can’t be avoided.

Pete Kelly, European market analyst for J.D.Power Automotive Forecasting, said Europe’s fate will be dominated by what happens in Germany, its biggest market.

“The problem the (European) industry will soon have to face is the market volume consequences of life after incentives,” he said. “There is some uncertainty relating to the exact timing of the next market plunge in Germany, but a plunge appears unavoidable,” Kelly said.

Professor Ferdinand Dudenhoeffer, of the Center for Automotive Research at Germany’s University of Duisberg-Essen, said the German market, artificially bloated in 2009 by what he called a “crazy” level of scrapping incentives, would dive by about 1 million cars next year from 3.7 million in 2009. That’s a fall of about 27 per cent.

(The German scrapping scheme expired at the end of August. The German government has said it won’t be extended.)

Bubble will burst
“It was wrong to have such a heavy Scrappage scheme in Germany. It has undermined used car markets and prices in new car markets. In 2010 the bubble will burst,” Dudenhoeffer said.

Because of the big fall in Germany, overall sales in Europe will slide by around 600,000 next year.

“In the U.S. and Asia, markets will improve. In Europe, the upswing will be delayed due to the big German Scrappage schemes,” he said.

Not everybody thinks that the scrapping schemes, which France has extended but watered down, will have such a negative impact.

Michael Gartside, analyst at the PwC Automotive Institute, believes that instead of dragging sales forward, the schemes have encouraged buyers who would otherwise never have bought a new car.

Scrapping found new buyers
“We believe the biggest impact of the Scrappage schemes has been the creation of new, incremental sales growth, bringing different buyers into the market who would not otherwise have made a vehicle purchase,” said Gartside.

Gartside said the government subsidies allied with manufacturers’ incentives created a new low entry point into a new car, which he estimated at between €5,000 and €6,000. This, coupled with the savings the owner of a 10 to 15 year old car could make in running costs made a compelling case for the purchase of a new one. Gartside reckons that sales in Europe next year will slip by only 4 per cent to 13.3 million; that’s still down more than 500,000 though.

Meanwhile, as the crowds made their way around car show stands, the manufacturers were making their presentations to investors about their prospects.

Although many CEOs were saying publicly that the worst of the recession, the worst for 60 years some say, was probably over, the future was more cloudy than clear. There was a huge breadth of ideas of what the future might bring reflected in the concept cars on display – Renault’s four battery electric cars, plug-in hybrids, diesel-electric hybrids, the odd fuel cell, and probably most important, new high technology ways of making traditional internal combustion engines more efficient.

Not surprisingly, the tone of the presentations seems to have been tentative rather than confident, according to Citigroup Global Markets auto analyst John Lawson.

“Almost every company presentation highlighted plans for investment in electric vehicles with uncertain return expectation; and generally views regarding the 2010 European auto sales outlook were cautious,” Lawson said.

There was nothing tentative about Renault’s attitude.

Renault-Nissan CEO Ghosn said hybrids are a blind alley. Battery power is the key, and he effectively bet the future of the French-Japanese alliance on this gamble. If he is wrong, watch out Renault shareholders.

In almost messianic speech to the Frankfurt Show, Ghosn unveiled four new battery-powered vehicles, which he says will lead the world to the electric age, and help an endangered planet. Ghosn said by 2020, 10 per cent of the global market for cars will be electric.

Ghosn said Renault will produce an all-electric compact van, a family car and a city car by 2011 and a five-seater by 2012. Renault plans to allow drivers of electric vehicles to rent the cars’ expensive batteries rather than owning them, bringing down costs. Ghosn said Renault’s four models would sell at a comparable price to similar diesel cars, but he didn’t give any more details.

The Twizy ZE, a tiny two-seat city car, will have an electric driving range of just over 100 kilometres. The other three models – the Fluence, Zoe family car and electric Kangoo van – will have a range of 160 kilometres.

Critics say Ghosn is way off beam.

Volkswagen expects 1.5 to 2.0 per cent global electric market share by 2020. IHS Global Insight says 0.6 per cent is more likely. Others say the expense of battery cars will put off buyers, and only government subsidies will make them a success. Luckily for Renault’s Ghosn, France has decided to buy 50,000 electric vehicles which might be extended to 100,000 a year over the next five years, and agreed to maintain the electric vehicle subsidy of €5,000 at least until the end of 2012, and will help the company produce lithium-ion batteries at its Flins plant.

Not serious
The Financial Times of London’s Lex column thinks the rush to electric vehicles shouldn’t be taken too seriously.

“There are holes in this shiny vision of the future. Perhaps the technical problems of electric cars – battery life, range, speed of recharging – will be overcome, perhaps not. Electric cars are relatively expensive (before government incentives) too. Then there is the small question of infrastructure. While petrol cars enjoy the benefits of billions of dollars of historic investment in supply infrastructure, electric cars do not,” Lex said.

“Huge losses in charging mean that electric cars are less energy-efficient than commonly thought. Worse, they are only as clean as their electricity. Fine if this is solar, nuclear or hydro-generated; not if it is from coal, oil, or, to a lesser extent gas. Mass market electric cars may be 10 years in the future for a while. Better to focus on more efficient petrol and hybrid ones first,” said Lex.

Astra, C-Max, Venga
The focus on the environment took some of the spotlight away from more mainstream new cars being launched at the show, including the Opel-Vauxhall Astra, Ford C-Max, and the Kia Venga. These mass market vehicles will have much more of an impact on car buyers than the environmentally inspired ones.

But the huge investments required to make sure manufacturers are prepared for an electric future, and also to conform to the upcoming European Union rules to raise fuel efficiency and cut CO2, mean that long term only the financially strongest will survive, says IHS Global Insight analyst Tim Urquhart.

This will be good for VW and Toyota, but eventually threaten BMW and Mercedes.

“The need for huge capital expenditure on future powertrain technologies and increased efficiency of conventional powertrains means that those companies that currently have the scale and financial resources such as VW and Toyota are likely to retain a competitive advantage, while the bold gamble on electric vehicle technology that Renault is taking may also pay off in the long term. Meanwhile BMW’s and Mercedes-Benz’s strategy of linking the premium with the sustainable will be successful, but long-term doubts remain over both companies’ ability to remain completely independent,” Urquhart said.

Neil Winton – September 30, 2009 

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