Rude Health Of German Automakers Threatened By Financial Ferment
You would never guess from looking at the impressive products and listening to the breast-beating CEO speeches at the Frankfurt Car Show that Europe’s automotive industry was on the brink of turmoil.
Just last month it seemed sunlit uplands awaited German manufacturers, which had sensibly used the previous downturn to slash costs and restructure. Prospects for Europe’s economy in general and the car industry in particular didn’t look too bad in August. Auto sales might have been stagnating, but at a relatively high level. Germany’s premium manufacturers like BMW, Mercedes and VW’s Audi seemed to have licenses to print money as they reported record sales and earnings, thanks to their ability to sell cars with fat profit margins to Europeans and Americans even in hard times, underpinned by China’s voracious appetite for flash motors.
Unreformed mass car manufacturers in France like Renault and Peugeot-Citroen, and Italy’s Fiat though were struggling to stay in the black. Generous government cash-for-clunkers subsidies helped them ride out the 2008 storm while allowing them to put off the day when harsh restructuring decisions had to be taken.
Then the financial panic struck, and all bets were off. Germany had looked to be a safe haven in the storm, but shocking figures from the OECD predicted that Germany’s economy would shrivel by an annualized 1.4 per cent in the fourth quarter after a previous expectation of three per cent growth, as the export drive fell victim to a global economic slowdown.
So even the high-flying German automotive industry is now threatened with a double dip recession as government austerity programs grip, or a collapse in the European common currency which would devastate German exports. Hopes that emerging market demand, mainly from China, would bail everybody out are also receding.
Many corporate leaders were in denial as the Frankfurt Car Show opened last week, preferring to wallow in recent glories rather than face up to possible nastiness in the future. But some CEOs were frank. “We’re in for a wild ride,” said Ford Europe’s Stephen Odell, a couple of days before Ford announced it was cutting back output of the Focus and Kuga. VW cut its outlook for global automotive market growth next year to 64 million from its earlier projection of 66 million and this year’s 61 to 62 million.
Investment bankers attending the show talked about how remarkable it was that presentations from the industry’s leaders were so optimistic, not admitting any signs of a current slowdown, although acknowledging the risk of a decline in 2012.
Fiat CEO Sergio Marchionne pointed to the elephant in the room, when he said the European single currency system could “go off the rails” unless political leaders resolved the current debt crisis. The industry is worried sick about the consequences of a collapse of the euro.
“If the euro collapses that would be a catastrophe for the German manufacturers. A return to the DMark, that would be a very, very strong currency and make it very difficult to export. It would be an absolute disaster for the Germans,” said Professor Stefan Bratzel, director of the Centre of Automotive Management (CAM) in Bergisch Gladbach, Germany.
Despite some dire predictions, the eurozone is unlikely to break apart, with the worst-case scenario the loss of some members like Greece, Portugal and Ireland leading to a smaller, more stable group. The more likely problem will be stagflation, with the risk that Europe and the U.S. will repeat Japan’s 20-year plight.
The crunch will come next year in Europe, as analysts slash up to 400,000 cars from Western Europe sales projections in 2012. Even Volkswagen, market leader in Europe, will come under pressure, although it currently has an order backlog of about four months. Next year things are likely to become more difficult, although the launch of the little Up city car at the show will help VW hang on to market share. If economies continue to contract, VW’s ambitious, some say hubristic, plan to be number one in the world by 2018, might look like over-reach.
Down in the cheap seats, Fiat, Renault and Peugeot-Citroen appear set for trouble, but even BMW, Mercedes and Audi are vulnerable if stock prices go down 20 per cent or so because even the well-heeled will start to worry about the future and rein in their spending.
China in particular and emerging markets in general are crucial to healthy German prospects. Chinese car sales growth has underpinned Mercedes, BMW and Audi’s huge profit margin achievements, but even China’s prospects are coming under scrutiny. If China catches Europe and America’s economic contagion, the Germans will quickly falter.
Looking to the medium and long-term, manufacturers are pouring huge sums of money into new electrification technology as governments demand more fuel efficiency, without being sure which will be successful. Will it be Toyota’s plug-in hybrid version of the Prius, or GM’s Opel-Vauxhall Ampera extended range electric car, Europe’s Chevy Volt?
Renault and its Nissan alliance partner have bet the ranch that battery only electric cars will be hugely in demand, predicting that global sales will reach 10 per cent of the market by 2020. Other manufacturers are much less confident, and most reckon two, three, or at most five per cent of cars will be battery powered by then.
If recession does strike again in 2012, strategy will be all about survival, not what electric technology might sell in 2020.
The Frankfurt Car Show closes its doors September 25.
Neil Winton – September 23, 2011
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