Frankfurt Show Sees Europe In Good Short-term Shape.
But Don’t Even Think About Upheavals, Hi-tech Raids.
“I expect to see another round of consolidation in the next two or three years”
The automotive industry must be hoping that after the German general election is over later this month, its exposure to relentless criticism over dieselgate corruption and the potential health risk some diesels pose, might wind down a bit.
It can then start to enjoy the fact that sales across Western Europe look set to remain relatively healthy. In fact one of the unintended consequences of the diesel scandal, led by Volkswagen’s cheating of government rules on noxious emissions and growing fears of the health risks they pose, has been schemes to persuade owners of old diesels to scrap them and buy a new gasoline powered one, thus boosting sales by up to 100,000 a year in Germany.
But once things return to some semblance of normal there’s a bigger threat which won’t go away. That is the fear that long term, high tech companies might use their massive resources to finance the imminent revolution, trump traditional players and eat their lunch.
As the biennial Frankfurt Auto Show gets underway this week sexy new machines will wow the crowds. But the industry is worried by the need to raise vast amounts of capital to develop alternative propulsion systems in the form of electric cars, and connected and computer driven ones too. In Germany, the controversy over diesels is reaching a crescendo, and not necessarily an intelligent, well informed one, as the German election approaches on September 24.
Most estimates of growth in the Western European market for 2017 come in at under 3%, down from last year’s 5.8% to 13.95 million, and 2015’s 8.9% gain. Western Europe includes all the big markets like Germany, France, Britain, Italy and Spain.
The threat from outsiders like cash rich Google, Apple, UBER or even Alibaba of China worries industry leaders, who will need to make big changes to their business plans to fight this off.
Shorter term problems like overcapacity haven’t gone away, and there is still a fundamental need for consolidation, meaning factory closures, firings and mergers. For years that was the shoe that never dropped, but at the last big European car show in Geneva in February, France’s PSA Group offered to takeover General Motors’ shareholder- value destroying Opel-Vauxhall.
To many observers surprise, including mine, the deal went ahead. We await news of the first restructuring plans which will almost certainly include Opel and Vauxhall factories. It won’t be a pretty sight.
And more recently, storied industry icon Sergio Marchionne, CEO of Fiat Chrysler Automobiles, is said to be ready to unload some of its choice money makers – SUV maker Jeep, and luxury pretender Maserati, with Alfa Romeo thrown in as a makeweight. The Chinese were said to be close to buying Jeep, but that’s gone quiet.
Nick Oliver, Professor of Management at University of Edinburgh Business School, said big decisions are due in the short term too.
“The European auto scene will be an interesting place to watch in the next few months. Overcapacity still continues and a slowing market is only going to exacerbate that. We’ll be watching what PSA does with Opel (and Vauxhall). I find it difficult to see anything other than consolidation unless we see a big increase in sales of the merged entity. With the slowing growth of Western European sales, it’s difficult to see anything other than rationalization and shutting down of factories,” Oliver said.
FCA in play?
Who is next in the takeover, merger and consolidation round?
“I watch for weak players making wilder and wilder forecasts and I’ve seen more of that with FCA and its associated brands. They seem to be getting more desperate. My hunch with FCA is it will sell off the bits doing better like Jeep, while the volume cars will whither away, not overnight, but over a decade or so. There will be continued pressure on other weaker players,” Oliver said.
Professor Stefan Bratzel, from the Center of Automotive Management (CAM) in Bergisch Gladbach, Germany, also believes the round of takeovers hasn’t finished yet, and longer term, big changes are coming in the way business is done.
“I expect to see another round of consolidation in the next two or three years. It is getting more expensive to fulfil the goals of electric mobility and autonomous cars. That all costs a lot of money and I think many car manufacturers will seek to share development costs. The business model is not adequate to meet the big changes in the mid-20s when the data players come into the industry,” Bratzel said.
Professor David Bailey of the Aston Business School in Birmingham, England expects some action from Fiat in particular, and mediocre sales growth.
“Time is clearly running out for Fiat as it continues to look for a partner. Marchionne is trying to talk up the prospects. Will Chinese players want Jeep? Will VW? As for the market, it’s hard to say but at best a slow recovery (from the 2008 crisis) is continuing,” Bailey said.
CAM’s Bratzel says it’s difficult to see how the car industry will develop long term, but outsiders, if they had the inclination, have the resources required.
“It could be the likes of Daimler or BMW with their mobility concepts
(Car share, short-term rental) will lead the pack. Or it could be UBER or Alibaba with lots of money offering mobility services but ordering cars from Volkswagen or whoever. It’s all open, but when you look at the (limited) market cap (value on the stock market) of the auto companies it will be a tough fight. There’s going to be a kind of war of the worlds over the next 10 years in the mobility market,” Bratzel said.