Worries Frankfurt Might See Profit Warnings Fail To Materialise.
Sales In Europe May Look Strong But Pricing Worries.
“This year’s targets may still be achievable, but Q3 results, will be scoured for signs that 2016 will make headlines for the wrong reasons”
Unfortunately for BMW CEO Harald Krueger, possibly the most notable image of the Frankfurt Car Show was his unfortunate collapse on stage as he made his presentation.
The good news though is that BMW said 49-year old Krueger has suffered no long-term health harm and was returning to work a week later. And there’s more good news. Some commentators had predicted that major auto manufacturers would use their press conference time in Frankfurt to issue warnings that profit targets would not be met because of disappointing sales in China and weakness in other markets.
Evercore ISI analyst Arndt Ellinghorst, not one of these Cassandra’s, published a report headed “Where are all the profit warnings?”.
“Not a single profit warning; no incremental negativity; companies were actually more positive and confident compared to the tone during Q2 reporting,” Ellinghorst said.
Before the show, Bernstein Research analyst Max Warburton worried that because weakness in China was likely to undermine profits at BMW, Mercedes and VW’s Audi and Porsche, companies might be forced to retract profit forecasts.
“We expect warnings as early as September or October. The Frankfurt Auto show in mid-September or Q3 results will provide the obvious opportunities for BMW and VW to warn. Daimler will come later – but reality will surely catch up in the end,” Warburton said.
He’s not right yet, but he might be.
Sales ratcheting up
Meanwhile, estimates of sales in the Europe continue to rachet up. IHS Automotive now expects E.U. sales to increase over six per cent in 2015 to almost 13.3 million. LMC Automotive upped its forecast to a gain of 7.5 per cent to 13 million in Western Europe. The previous month LMC had predicted a 6.7 per cent rise to 12.92 million.
But despite the relentless improvement in sales, doubts remain about their quality, with much discounting and price cutting believed to be behind the increase.
IHS Automotive analyst Carlos Da Silva is confident that in Europe, the economy is likely to be spared “dramatic turbulences”.
“The European market is clearly benefiting from the release of pent-up demand in the region. Although this is mostly from the fleet and company car side of the market, it should be noted that private demand experienced a rather encouraging summer period with a certain push visible in the Southern countries. Although the macro economy is far from perfect, it is still much better than in the recent past,” Da Silva said.
No pricing power
Morgan Stanley analyst Harald Hendrikse reckons worries about China have been overdone, and from conversations with CEOs at the show expects a broadly flat market in the second half. As for Europe, he concedes there is a recovery in sales, but says manufacturers have no pricing power.
“We continue to be perplexed by the strength in Europe, but it seems we may have underestimated the power of Financial Services deals in attracting more credit to the autos market, even without improvement in European job creation or wages,” Hendrikse said.
“(manufacturers in Frankfurt) were not willing to suggest any improvement in the pricing environment, and Peugeot and Renault both questioned whether they would be able to price increasing content to the end customer. Cost headwinds from CO2 and electronic content continue unabated,” Hendrikse said.
The Financial Times’ Lex column also noted the lack of expected profit warnings, and had this to say about China.
“Europe’s carmakers have been adding manufacturing capacity in China at the same time as domestic brands gain traction, the bargaining power of dealers is rising and price discounting spreads. Even if China sales grow again, margin pressure will remain,” Lex said.
Bernstein’s Warburton worried that many of the new cars at the show – the Bentley Bentayga, Mercedes GLE coupe, the Jaguar F-Pace, Mercedes S class Maybach, Rolls Royce Dawn and BMW 7-series – had all been designed with China in mind, a market that may no longer exist.
Will China fall short?
“A lot of these products are going to fall short of budget if the high end Chinese market doesn’t roar back soon,” Warburton said.
Lex creased its brows because of the impact of changes needed to meet upcoming CO2 rules.
“A step change is needed. The technology is available: electric, hybrid and plug-in hybrids on show in Frankfurt meet the target, but sales are slow. They are expensive to make and to buy, and industry needs state help to offer consumers incentives and build electric charging infrastructure,” Lex said.
Looking at new models announced at the show, including the Renault Megane, VW Tiguan, Mercedes GLC, and Jaguar F-Pace, Morgan Stanley’s Hendrikse said this suggested increasing competition, and had these thoughts –
- The C-segment is getting very crowded and the addition of the new Megane and Opel-Vauxhall Astra suggests this won’t change. We would worry about pricing as manufacturers fight for share.
- The small executive premium segment is not just 3 anymore. Jaguar, Lexus and Infiniti are adding very interesting new models that will give consumers choice and potentially better pricing.
- Mercedes GLC will cause similar upheaval to the BMW X3 and Audi Q5 as the Mercedes GLA has done to the BMW X1 and Audi Q3.
- Mercedes insistence that it will go from 30 to 40 models may provide volume, but incremental segments are getting smaller, we see potential for excess complexity and cannibalisation, and competition will be intense.
The FT’s Lex said profit targets may be attainable, but times will get harder.
“This year’s targets may still be achievable, but third-quarter results, due in November, will be scoured for signs that 2016 will make headlines for the wrong reasons,” Lex said.