The war in Iraq has been quick and clean and the nightmare scenario for European car manufacturers is receding. Get ready for the, relatively, good news. Sales in 2003 will just be bad. Neil Winton reports on the latest views of analysts and investment bankers.

The European economy is stalling, and the strength of the euro is making it tougher for the likes of Volkswagen, BMW, Mercedes and Porsche to make money in the U.S. Although car sales in Europe will probably now only slide by up to 5 per cent from recent record peaks, there is the possibility that they might well dive another 15 to 30 per cent in coming years before rallying again, if earlier sales peaks and slumps are any guide.

With the statue of Saddam Hussein smashed to the ground in central Baghdad, it seems hard to believe now but the possibility existed that the war between coalition and Saddam's Iraqi forces would be long and bloody and might end in stalemate, or defeat for the West.

This would have meant a consumer confidence crisis in Europe as oil prices zoomed, with catastrophic prospects for European carmakers. PSA Peugeot-Citroen Chairman Jean-Martin Folz warned during the Geneva car show in March that a prolonged war with Iraq, with zooming oil prices, could mean sales crumbling by as much as 10 to 15 per cent, with more than 2 million potential buyers sitting on their hands.

So the good news is that, according to investment bankers, European car sales in 2003 will fall "only" by up to about 5 per cent, or around 700,000.

Back to 'normality'
More humdrum factors have replaced worries about conflagration in the Middle East, like deteriorating economies in Europe. The European Commission has just cut its forecasts for economic growth in the euro zone this year to 1 per cent from 1.8 per cent. In 2004, euro-zone growth is expected to hit only 2.3 per cent down from an earlier forecast of 2.6 per cent. In 2002 the euro-zone economy grew 0.9 per cent.

Overall, about 100,000 jobs will be lost this year in the euro zone, with unemployment jumping to 8.8 per cent from 8.3 per cent, not a great backdrop for selling new cars.

There is some good news from Germany
Germany, Europe's biggest market for cars, is tottering, economically. The German economy is expected to grow only 0.4 per cent this year, down from last autumn's forecast of 1.4 per cent. There has been some good news though from Germany. The Schroeder government's Red-Green coalition plan to increase company car taxes fell into the cracks in the negotiating process between the upper and lower houses of Germany's Parliament.

According to Deutsche Bank, this is unlikely to have much of an impact on the number of cars sold in Germany, but removes an obstacle to buyers of more expensive, better-equipped vehicles. "Bottom line, it is positive news, but will not reverse the weakness of the German car market," Deutsche Bank said.

Germany's Commerzbank Securities is typical of investment banks views of the prospects for Europe's car sales and carmakers. "Previously, we had assumed that (European) sales fell 3 per cent in 2003 to 13.95 million units before rebounding 3 per cent in 2004 to 14.4 million units. We now expect the contraction to be around 5 per cent in 2003 and a more muted rebound in 2004 of 1.6 per cent," Commerzbank Securities said in a report.

How far will Europe's car market fall?
European car sales totalled 14.39 million in 2002. Deutsche Bank now expects sales to fall 4.1 per cent in 2003. Berenberg Bank sees a 4 per cent decline. Industry researcher J.D.Power is at the higher end, expecting a 5.3 per cent fall. A couple of months ago most estimates for 2003 sales were less pessimistic, ranging from falls of between 1.8 and 3.4 per cent.

Euro currency strength
Commerzbank Securities said it now had more cautious assumptions on economic growth, the strength of the U.S. market, and prospects for the euro.

"The euro has continued its recovery against both the pound and the dollar in Q1 2003 averaging $1.07 and £0.67 up from the $1.00 and £0.64 of three months earlier. Previously we had assumed that the euro would average around $1.00 and £0.65 in 2004 and 2005. We now assume it averages $1.08 in 2003 and $1.10 thereafter, an upwards revision of 8 per cent then 10 per cent," Commerzbank Securities said.

Buy BMW, VW; avoid DaimlerChrysler, Porsche
Commerzbank Securities still believes that some companies will do well in these harsh conditions, recommending investors buy luxury carmaker BMW and market leader VW shares. Some companies will be stumbling though, with DaimlerChrysler and sports car manufacturer Porsche its least favoured candidates.

"VW and BMW are our two "buys" amongst the European assemblers right now. We believe both will lead in terms of volume growth in 2004 and 2005 because of new product flow. In 2003, BMW is set to launch more new models or variants than it has ever done in a single year whilst VW launches a new model or variant every three weeks," it said.

DaimlerChrysler will suffer from its U.S. subsidiary's struggles against harsh competition from General Motors in the U.S. Porsche's U.S. sales are vulnerable because of the euro's strength, while prospects for the 911, and even the new SUV, the Cayenne, worry Commerzbank. In March, Porsche announced production cuts for the 911 and Boxster models.

But worries that U.S. consumers would stop buying German products because of Chancellor Gerhard Schroeder's negative role in the build-up to war in Iraq, don't seem to have materialised, thanks to the speedy end to hostilities.

New model action to accelerate in 2004
Deutsche Bank is pinning its hopes for a healthy future for the car manufacturers on the accelerating number of new car launches in coming years. It calculates that only 17 per cent of manufacturers' car ranges are set for renewal in 2003, but that this will rise to 22 per cent in 2004, and 23 per cent in 2005.

"New model launches are vital in this industry since new models offer better earnings protection in difficult times and need lower sales incentives. New models cost 10 to 12 per cent less to produce than the models they replace, since further savings can be made from common platforms/common modules," Deutsche Bank said.

Deutsche Bank points to launches later this year like the VW Golf, Megane Scenic, Fiat Gingo, Fiat Punto MPV, Citroen Pluriel and C2, Peugeot 307 convertible coupe, which augur well for earnings in 2004.

"Next year is set to be an important year with the new Peugeot 107, Renault Clio MPV, VW Polo MPV, Opel Astra, Citroen C4, Peugeot 407, and VW Passat. In 2004, VW (27 per cent), Opel (29 per cent) and Fiat (30 per cent) should have the strongest renewal rates in the industry," Deutsche Bank said.

In 2005, Deutsche Bank estimates that PSA Peugeot Citroen's renewal rate will hit 32 per cent, Fiat's will be 29 per cent, and BMW's 28 per cent.

If all this potential good news is making you over-excited, let's return again to the Commerzbank Securities report, which suggests that there might well be a large amount of pain for the industry to go through before good times re-emerge.

"U.S. and European vehicle sales in 2002 were only 3 per cent and 5 per cent off the peak of 1999, whereas the two previous downturns have seen sales fall from peak by around 15 to 30 per cent," Commerzbank Securities points out ominously.