How Many European Carmakers: Will Survive?

By: Andrew_McKillop

“It is unclear if all carmakers will survive without governmental help,” was the terse one-liner from the CEO, Hans Dieter Poetsch, of the VW-Porsche automaker group at the start of the Paris Motor Show.

For some European carmakers in an industry credited by carwatcher ACEA, the European Automobile Manufacturers Association with an annual turnover and revenues close to 500 billion euros in 2010, employing a total of around 12.5 million Europeans (direct and indirect), the end could come rather soon. For Dieter Poetsch and many analysts, carmakers in southern Europe producing small cars with low profit margins per car - and declining sales - will be the first to go. The bad news is that declining sales and an unremitting price war is causing industry wide and continent wide damage.

All three of Europe’s largest automakers - VW Porsche, Peugeot PSA and Renault - are confronted by falling sales and unit prices, made worse for Peugeot and Renault by their midrange and small car production strategy. Even luxury car producer Daimler has however been hit by intense downward pressure on prices in Europe. ACEA predicts that sales may reach a 17-year low this year and will not recover in 2013. Dealers in Germany, the region’s biggest economy, offered discounts on average of 12 percent off the sticker price in August 2012, the highest rate in more than a year, but this is dwarfed by huge discounts operating in other market segments and countries, according to car market analysts.

PRICE MELTDOWN AND DELOCALIZE OR DIE
According to Credit Suisse car analyst Erich Hauser reported by Bloomberg “The biggest problem for the industry is the complete meltdown of pricing discipline”.  Susan Docherty, head of General Motors' Chevrolet brand in Europe told reporters at the Paris Motor Show that with discounts and buyer incentives at current levels in response to industry contraction, “No one can make money”

Seemingly a bright spot suggesting light at the end of the tunnel for Peugeot, its CEO Philippe Varin said the French carmaker’s cash burn, reported by French media including Les Echos as "nearly 200 million euros per month", may end in 2014 and Peugeot can attain its drastic savings targets in 2015. This however supposes the automaker can continue its massive, ever increasing delocalisation. This strategy, now taking on the hues of a rout with the sole aim of getting out of Europe, after first getting out of France, extends from China and Malaysia, Morocco, Tunisia, Turkey and Egypt to Russia, India, Uruguay and Argentina - among other new or expanded production sites, worldwide. In all cases however, the Peugeot delocalisation strategy, like the same strategy of other European automakers was based on a double logic that no longer holds: sales in Europe would hold up, as would prices, and sales would expand rapidly in all non-European markets.

Neither of these has happened. Staying with Peugeot, its recent and current non-European carmaking capacity additions, by 2015, will attain at least 600 000 cars per year, according to the France based Transnationale industry watcher group. The strategy was focused not only on producing locally and selling into local markets, but also to raise car import supply for the French and European market. How long Peugeot can maintain this strategy is now an open question.

The comforting image of Germany's car industry being sheltered from downturn has also been trashed.
Daimler AG, the world’s third-largest luxury-vehicle maker, said September 20 that earnings at its car division will fall in 2012 as the steep market decline hurts second-half business, prompting the Stuttgart-based company to set its own efficiency programme in response. Underlining how fast things have changed, Daimler's CEO Dieter Zetsche, at the Paris Motor Show declined to outline details "because Daimler is still working out measures", and efficiency and sales growth should be seen as “two sides of the same coin,” he told journalists at the Paris show.

The sombre bottom line for Europe's automakers is also underlined by ACEA, which forecasts that car sales in the region this year will be at the lowest level since 1995. Car production which attained 15.9 million in 2010, according to ACEA, may fall below 13 million in 2013, in some scenarios by leading car market analysts, in a European car market where “No one can make money”.

"The car-pricing situation in the region is very tense and 2013 will probably be a challenging year as well", Christian Klingler, VW Porsche sales chief, said at the Paris Motor Show. He added that in his view the market cannot show any “fundamental improvement” until at least 2014. To be sure, European carmakers, like GM in the US, but also BYD of China are now counting on government subsidy.
Peugeot is cutting 8 000 jobs, shutting its factory in the Paris suburb of Aulnay, and shedding 25% of its labour force at its Rennes carmaking site. The measures prompted French industrial recovery minister Arnaud Montebourg in July to offer loans and tax breaks for French automotive manufacturers and incentives for drivers to buy high-priced hybrid and electric cars.

PERMANENT CONTRACTION?
Fiat CEO Sergio Marchionne, who currently heads ACEA, has urged his European counterparts to come up with a comprehensive plan to cut overcapacity throughout the region. Using data from ACEA and even in 2010, with sales still bolstered by massive subsidies operated by many EU27 governments for "climate conscious low CO2" car buying in 2008-2009, European sales trailed car production by about 1.25 million. The downsizing move proposed by Fiat's CEO is however resisted by VW Porsche and other German carmakers, who are not yet facing Italy-based Fiat's losing streak, with Fiat set to lose 700 million euros in Europe in 2012, leading to an immediate cut of its investment spending by 500 million euros, to limit the cash burn.

Industry analysts identify Fiat and Peugeot as having the worst balance sheets among major producers, but an increasing number of smaller carmakers, like Spain's SEAT and the Czech Republic's Skoda, both of them German controlled or affiliated, are in the same boat. Fiat has started shuttering its car plants, and Detroit-based GM, allied to Peugeot in Europe, is likely shutting a factory in Germany.

The always fuzzy-edged and hopeful idea that hybrids and electric cars could "take the strain" is above all taking its own severe taste of the real world. Leading Chinese hybrid and electric carmaker BYD’s Hong Kong-listed shares are in September 2012 down about 85 per cent from their 2009 peak, and the share price has tumbled more than 40 per cent in the last three months. The company warned in April that its first half net profit will fall by 75 to 95 per cent and the reason why, despite the sharp correction, BYD can still attract investor interest is nothing to do with Warren Buffet, who took a highly publicized interest in the carmaker: BYD expects the Chinese government to bail it out.

European carmaker share price movements will now move the same way, in lockstep with rumours of governments aid, subsidies and bailouts to preserve jobs.

The will of the wisp of "energy transition" driving car buyers to purchase $35 000 electric car sedans with a real world road mileage capability of 75 miles after an 8-hour charge, is now receding as fast as the "low CO2 climate crisis" sales theme used by carmakers, and by governments handing out $5000 in subsidies for the purchase of each car in Europe. The relentless trend for European automakers, and in other regions, is low cost cars for the mass market and ultra high-price luxury cars, for the tiny high end.

World carmaking overcapcity can be judged by ACEA figures suggesting that even in 2010 - now a highwater mark for global automakers - world carmaking capacity was at least 70 million, but total sales were around 59 million. In theory, with sufficient handouts from government and even a slice of Warren Buffet's speculative plays on a win some-lose some investing basis, global carmaking capacity could go on rising even if sales do not. For Europe however, the end of the road has already been reached. Downsizing of the industry has started, and in the short term, which will in fact stretch for years, car prices can only fall.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

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