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Leaders In Paris Agree Limping Europe Hasn’t Bottomed Yet

VW Golf


New Golf VII Being Discounted Already
“This is the worst market in Europe in the last 20 years”

But Don’t Expect To See Any Company Bite The Dust

Industry leaders at the Paris Car Show vied with each other to come up with the worst possible scenario for the European industry, and Renault Chief Operating Officer Carlos Tavares probably summed it up as well as anybody.

“We can’t see the beginning of the beginning of a rebound. We are not certain to have touched bottom. We are now stuck in a situation that could last,” Tavares said in a radio interview at the show.

Experts away from the show were agreed about the serious threat to the industry, but nobody thought bankruptcies were on the cards.

Sales are sliding to new depths because of European economic weakness made worse by the euro currency crisis which has undermined consumer confidence. Moody’s Investors Service said West European car sales will fall another eight per cent this year and dip a further three pct in 2013. Most observers reckon that there will be precious few signs of any sales upturn by 2015 at the earliest.

General Motors Europe’s Opel-Vauxhall and France’s Peugeot-Citroen are each building up losses of more than $1 billion this year. Ford Europe won’t be far behind either. Fiat is losing big money in Europe too, while Renault is the least exposed, propped up by its shareholding in Nissan and its successful Dacia downmarket car subsidiary. Until recently, the German manufacturers seemed immune from the crisis, but before the show Mercedes warned its profit will be less than expected this year. Even luxury sports-car maker Porsche announced it had cut production plans for 2013.

Peugeot-Citroen was thought by many to be the biggest loser in Europe. Not so, said CEO Philippe Varin at the show.

“Some of our competitors in Europe are losing even more money than us on every car they sell,” said Varin.

Market leader VW was standing fast against the onslaught, saying its profits this year won’t be much changed from last year’s, as it unveiled its new Golf VII, perhaps the most important new car at the show. VW Chief Financial Officer Hans Dieter Poetsch, was the only voice suggesting it might be terminal for some.

“It is unclear if all carmakers will survive without governmental help,” Poetsch said.

Shoal of small SUVs
Other new machines vying for the spotlight were the Ford Mondeo, and Opel-Vauxhall’s little Adam city-car. Jaguar’s beautiful new F-Type two-seat sports car was likely to be the most photographed car, while there was a shoal of small SUVs including the Opel-Vauxhall Mokka, Peugeot 2008, Chevrolet Trax, Mini Paceman. Volvo V40 Countryman, Hyundai Santa Fe and Honda CRV.

Away from the show, experts were also competing with each other to come up with the worst possible projections, although nobody played the death card.

“This is the worst market in Europe in the last 20 years,” said Professor Ferdinand Dudenhoeffer of the Center for Automotive Research (CAR) in Duisberg-Essen.

“I think the market will become more difficult with more rebates and incentives with the (European) economy faltering and competition becoming more intense. Even the German car market is going into recession,” Dudenhoeffer said.

Dudenhoeffer pointed out that even the new VW Golf VII, which hasn’t reached the showrooms yet, is already being offered for sale in Germany with a 20 per cent price discount.

Will any of the weakest companies be forced into bankruptcy like GM and Chrysler in the U.S. in 2008 and 2009?

Very demanding, challenging
“It’s difficult to say but the next three or four years will be decisive. The two weakest, Opel-Vauxhall and Peugeot–Citroen are in a very demanding and challenging situation,” Dudenhoeffer said.

Both companies need to close excess capacity but are not doing it fast enough. Opel has said it might close a plant in 2016, while Peugeot has said it wants to close one plant near Paris. The French government, after seeming to go along with the idea, is now having second thoughts.

“The French government has said to Peugeot we agree that you have overcapacity, but why don’t you start (closing plants) in Spain,” Dudenhoeffer said.

Garel Rhys, Emeritus Professor at Cardiff University’s Business School, doesn’t think companies will die, but that factories will close.

“I don’t see anything as drastic as anyone leaving the market. I don’t sense that anyone is in such dire straits to put a question mark over their future. I don’t see a disappearance in the next two years,” Rhys said.

“That’s not to say that plants won’t close,” Rhys said.

Rhys said GM might lose patience with Opel and take the opportunity to merge Vauxhall, the British arm of GM Europe, into Chevrolet, its value-brand which operates independently of Opel-Vauxhall. That would leave the rump of Opel to fend for itself.

Three speed
Karel Williams, Professor of Accounting and Political Economy at the Manchester Business School, sees what he calls a three speed industry with the German premium manufacturers BMW, Mercedes and Audi/VW at the top pressing down on the troubled mass car makers in the middle which are being squeezed from below by the Koreans Hyundai and Kia, Chevrolet and Renault’s Dacia. The mass car makers are seeing their upmarket Ford Mondeos and Opel-Vauxhall Insignias being rejected in favour of premium cars like the BMW 3-series and Audi A4, while their cheap cars are being undercut from below. Even though the mass car makers are now producing cars of great quality, they are losing out to German premium ones even though they are now almost impossible to differentiate in terms of quality and performance.

“Paradoxically, mass market brands are producing fantastic cars but everyone wants an Audi or a Mercedes,” Williams said.

Williams said that the Germans are hoping that Hyundai’s push to higher quality will end before it can pose a threat to them.

“The Germans are assuming that Hyundai (and its sibling Kia) will stop in the middle of the market where Toyota and Honda did. But the speed with which Hyundai has moved upward towards mid-market competition with the i30, i40 and Santa Fe is really jaw dropping. My guess is that they will do a kind of Lexus-Infiniti operation which will probably be geared towards the European market,” Williams said.

Toyota launched its Lexus upmarket brand and Nissan later did the same with Infiniti. Both were very successful in America but spluttered in Europe.

“Can the Koreans compete with the German brands. That’s the big question,” Williams said.

John Wormald, analyst with British automotive consultancy Autopolis agrees that despite huge problems no company is going to die. European governments won’t allow it.

Cave into the blackmail
“National governments will take fright at that prospect and cave in to the blackmail. In pure financial terms GM ought to dump Opel-Vauxhall. But do you do that, when you are still one of the three global leaders? Would Frau Merkel (German Chancellor) allow it? Renault hasn’t achieved much on its own but has largely been propped up by its acquisitions. Peugeot-Citroen has done none of this and is, I suspect in pretty bad trouble…… but I don’t think it will be allowed to go to the well,” Wormald said.

“It would be healthier for everyone else if one or two exited the industry, but I don’t see their national governments allowing it to happen, cash-strapped though they are,” Wormald said.

And then there is China.

The German premium car makers have been making huge profits there – 50 per cent of BMW, Mercedes, and VW/Audi earnings come from China, according to stockbroker Bernstein Research. But recent political developments in China have made some investors worry this could all come to end, with catastrophic consequences for the Germans.

“I think there is risk attaching to China. China isn’t a normal market. There are huge disparities in income and wealth, which could even threaten political stability,” Wormald said.

Worth the risk
Don’t worry, says Professor Rhys.

“The risk in China has been higher than most places, but the growth of the benefits is worth the risk,” Rhys said.

Rhys said if China grows at 10 per cent a year that could double the economy in seven years, raising vehicle sales to around 30 million a year from 16 to 17 million now.

“China’s growth potential is still enormous and absolutely mouth-watering,” Rhys said.

There are other more important things for CEOs worry about than China, says Alix Partners managing director Stefano Aversa.

“(European) Industry leaders will probably be watching the evolution of the euro crisis, or the race for President of the United States. That’s much more important,” Aversa said.


Neil Winton – October 1, 2012

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