The European carmakers are in trouble. The latest earnings reports reveal much pain and little sign of gain. Most of Europe's car companies are losing money or just breaking even on their core manufacturing businesses and are being kept afloat by their financial services operations (BMW being a notable exception). And the Japanese plus diesels equals danger. Neil Winton reports.

Fiat, Renault, GM Europe and Ford Europe are in varying degrees of trouble. Volkswagen is under threat from a sudden weakening of its position in China. BMW though is weathering the storm.

As the European economy apparently stutters back to life, prospects for revival in 2004 are limited. Any increase in sales next year is likely to be vacuumed up by the Japanese who have belatedly begun to bring diesels to market to fill the previous gaping hole in their product offerings.

Now that the companies have finished reporting financial results for the third quarter, the full extent of the damage can be seen. According to Stephen Cheetham, auto analyst at Sanford C Bernstein in London, it is not a pretty sight.

"We're in the usual cyclical pain mode now. Everybody is doing quite poorly, either losing money or at breakeven in the core business. The headline numbers are looking better because of financial services which tend to be less volatile than core automotive earnings," Cheetham told Just-Auto.

3rd Quarter 2003 EARNINGS vs Q3 2002
VW
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operating profit 510 million, down 57%
DaimlerChrysler
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1.25 billion euros (before charge), down 19%
BMW
-
net profit 445 million euros vs 433 million
Fiat Auto
-
operating loss 314 million euros vs loss 340 million
Renault
-
no details about profits
Peugeot
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no details about profits
Ford Europe
-
pretax loss $452 million vs loss $246 million
GM Europe
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loss $152 million vs loss $180 million

3rd Quarter 2003 SALES vs Q3 2002
VW
-
21.3 billion euros, almost unchanged
DaimlerChrysler
-
34.6 billion euros vs 36.3 billion
BMW
-
9.95 billion euros vs 9.97 billion
Fiat Auto
-
4.2 billion euros vs 4.7 billion
Renault
-
8.7 billion euros, up 9%
Peugeot
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12.36 billion euros, down 3.5%
Ford Europe
-
$4.7 billion, up 7%
GM Europe
-
no sales breakdown

"Fiat is doing worse than everybody else. Ford (Europe) and GM (Europe) are under big pressure," Cheetham said. Renault and Volkswagen are feeling the pinch. Only PSA Peugeot Citroen, BMW and the Mercedes arm of DaimlerChrysler are performing adequately, Cheetham added.

For the car manufacturers to prosper, Europe's economy must start performing, and there are some early positive signs. "Signs of growth in the eurozone economy resemble a spluttering Vespa scooter when compared with the souped-up Harley Davidson of the U.S. economy. But at least the eurozone has now pulled away from the curb," said the Financial Times Lex column.

Historically mild
Cheetham said the European recession has been mild by historical standards.
"The auto companies usually lose money in a recession. If economies are doing well earnings pick up. If it doesn't, they won't. The biggest driver of earnings is volume," Cheetham said.

Latest data from Eurostat in Brussels show the euro-zone 12-member currency area has begun to grow again after a slight contraction in the three months to June. But the European Commission doesn't expect the recovery to gather steam quickly. In its latest forecast, it expects gross domestic product to rise by between 0.2% and 0.6% in the fourth quarter of this year, and by between 0.3% and 0.7% in the first quarter of 2004.

So the car companies won't see prospects transformed next year by a burgeoning economy. They will have to fight like ferrets in a sack to retain market share and keep the production lines rolling.

Volkswagen's China worry
Volkswagen, Europe's biggest manufacturer, would seem to be well placed, even though it is currently struggling. VW has just launched the latest iteration of its best selling Golf, and its sibling company Audi has replaced its biggest seller, the A3. But according to investment banker Goldman Sachs, VW will be hard pressed to keep profits up, not least because of its involvement in China.

VW has invested huge sums in China and is the market leader. In 2003, profits from China are likely to account for between 70 and 80 per cent of VW's profits. But Goldman Sachs reckons that the most recent data from China shows worrying signs of a slowdown in earnings there. If this continues in 2004 it could offset some of the gains from sales of the new Golf V and new Audi A3. VW has also made big profits from sales in the U.S., and these are under threat from the falling dollar. VW has also taken a hit in the form of a write-off from its ill-fated Phaeton luxury car project.

"Will VW do better into 2004 because of the new Golf? I'm sceptical about that. I also doubt that Renault will get much benefit from the new Megane," said Sanford C Bernstein's Cheetham.

Renault margin improvement
Although Renault doesn't publish quarterly profit figures, it did say when announcing sales details that its profit margins would increase next year, thanks to the new Megane and Megane Scenic ranges. Addressing the press at the Tokyo Car Show, Renault chairman Louis Schweitzer said Renault operating profit margins in 2004 would be pushed up to more than 4 per cent, from a target of 3.5 to 4 per cent for this year.

Goldman Sachs shares Cheetham's doubts. "While Megane does well, Clio and Laguna continue to sink. Management appears strangely unconcerned, insisting that the plants are still near full capacity. We find it difficult to see how Renault cannot avoid production cuts at plants like Flins (home to Clio and Twingo). Laguna and Clio are likely both loss making, leaving Renault still as a one product bet," said Goldman Sachs.

Peugeot profits warning
Renault's compatriot Peugeot also declines to reveal quarterly profit figures, but it warned, when revealing sales figures, that profits for all of 2003 won't meet previous expectations because of weakness in the European market, and the impact of a strong euro.

Peugeot said its operating margin for 2003 for its core car making operation would fall to about 3 per cent, compared with its previous target of 3.7 per cent. In 2002, Peugeot's profit margin was 5 per cent.

Can Fiat hold on?
It has been a while since Fiat Auto had anything but red ink to contend with, and although it cut losses slightly in the 3rd quarter, investment bankers fear for the company's future. Merrill Lynch believes losses at Fiat Auto will continue through 2005.

Goldman Sachs remains unconvinced that a turnaround is imminent. "In our view it will be very difficult for Fiat to return to meaningful profit over the next few years. Margins in the European auto industry are remarkably low even for well-placed producers such as VW and Renault. If these companies are struggling to make a profit, what hope is there for Fiat," Goldman Sachs said.

Chrysler negative
DaimlerChrysler, despite success at its Mercedes luxury car subsidiary, continues to be brought low by its Chrysler operation. Profits dropped 19 per cent in the 3rd quarter (which turned into a loss after taking account of a one-time accounting charge from the drop in value of its stake in European Aeronautic Defense & Space Co), and soon after this news Standard & Poors, the leading rating agency, announced it was downgrading DaimlerChrysler's credit rating.

DaimlerChrysler made positive noises after this news, but not many were convinced. "DaimlerChrysler's optimism has a hollow ring to it," said the FT's Lex.

Ford, GM
Ford Europe's losses dwarfed even Fiat's. In the 3rd quarter it lost $452 million, and said it expects a whopping, eye-watering loss of $1.2 billion for the year, and will also take a $600 million charge on its books for European restructuring this year. Last week Ford Europe said its restructuring programme - shedding 6,700 jobs in Belgium, Germany and Britain - would save $450 million next year, and about $550 million thereafter.

GM Europe's losses came despite great new products like the mini MPV Meriva and the highly successful compact MPV the Zafira. The latest European car sales figures provided another slap in the face for any would be optimists.

Japanese on the march
October sales fell 0.3 per cent, after expectations that an acceleration was in the offing. The figures also contained some scary evidence for the Europeans. Japanese carmakers took 13.1 per cent of the market in October, bringing their share for the year so far to 12.7 per cent, ahead of the record 12.4 per cent set back in 1991.

Mark Little, auto analyst with Deutsche Bank, told the FT that this Japanese growth was all the more impressive because many Japanese cars have no diesel engine option, in a market where almost half of new cars are diesel.

"In two or three years' time all their cars will have full diesel availability so they will be competing for the whole market, not just 50 per cent of it," Little said. Sanford C Bernstein's Cheetham agreed.

"The Japanese are making hay and everyone else is suffering. 2004 is not going to be a banner year. The (European) companies are quite downbeat for 2004," Cheetham said.