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Scrapping Plans Slow Sales Slide, But Implications Opaque

Hyundai A Big Beneficiary in Germany.
Most Sales Seem To Be Of Small Cars With Miniscule Profits.

The fall in Western Europe’s car sales has been slowed by scrapping incentives in Germany and France, but investors worry that the quality of the sales in terms of profit margins and origin, are not going to be much help to Europe’s mainstream, and threatened, manufacturers.  

According to ACEA, Western Europe’s car sales fell “only” 17.3 per cent in February, while sales in Central and Eastern Europe fell 30.3 per cent.

Global Insight said Germany’s car sales in the month jumped 21.5 per cent to 277,800, following the government’s offer to give buyers who scrap nine years or older cars €2,500 towards a new one, or a car less than one year old.

Most sales generated by scrapping are occurring at the bottom end of the market where BMW, Mercedes and Audi have no representation, and VW and Opel limited presence. One in two sales are going to non-German brands.

“The biggest improver of the top-ten car brands in February was Hyundai, which saw its sales rise 229.2 per cent year on year to 11,979. This was because, like Ford (Fiesta), the company has launched a new B-segment model, the i20 and the A-segment i10 in recent months. These models exemplify the leap forward in quality and driving dynamics that Hyundai has made over the last five years. Coupled with long and comprehensive warranty and a relatively low unit price they make a compelling argument for consumers buying a new car with scrapping incentives,” said Global Insight analyst Tim Urquhart.

Cash for clunkers
Citibank Global Market’s John Lawson agreed that the scheme had limited benefits.

“We have entered a period of (volume) respite driven by ‘cash for clunkers’. However, the benefit is highly concentrated geographically (Germany and Italy, notably) and by segment (cheap cars where the support is most beneficial). It is also likely to be very temporary, with arguments already raging about the extension of Germany’s scheme. Beyond the charmed circle, business remains dire, especially in Eastern Europe,” Lawson said in a report.

Nomura International analyst Jeremie Papin thinks scrapping sales aren’t doing much, if anything, for profits.

“The prospect of stronger sales in Europe on the back of generous scrapping incentives has provided something of a false dawn for profits. As the February registrations data in Germany showed – A-segment up 155 per cent – the sales mix of these positive registrations is very weak. This may help absorb fixed costs, but the low prices of small cars and the associated promotional activities –  manufacturers are matching scrapping incentives in some countries – almost certainly means cars being sold are loss-making,” Papin said.

Neil Winton – March 13, 2009

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