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October 18, 2004updated 07 Apr 2021 12:32pm

Europe’s carmakers face stagnant sales, tough competition

Car manufacturers have packed up their stands at the Paris Car Show and are returning to base. They can be forgiven if they pack away their smiles for the duration as well. Neil Winton reports.

By bcusack

Car manufacturers have packed up their stands at the Paris Car Show and are returning to base. They can be forgiven if they pack away their smiles for the duration as well. Neil Winton reports.

Mondial de l’Automobile closed its doors to the public on October 10 at the Porte de Versailles in Paris for another two years, and despite the undoubted fact that the cars being unveiled were often exciting, affordable and achieved technological standards unthinkable even ten years ago, the European manufacturers face a grim future.

Not only are sales going to stagnate, but any growth that does emerge is likely to be snapped up by Japanese and Korean producers, who are now adding style to their more traditional qualities of affordability and reliability.

They are even matching Europeans in diesel technology.

“Most people think that there is very little growth in the market in the immediate future, but any way you look at it the guys who are capturing market share are from Japan and Korea,” said Manchester University’s Professor Karel Williams in an interview with just-auto.

“What the European manufacturers need is a really good expansion of the market, to make some money and think about restructuring, but they are not going to get it,” Williams said.

No disputing the gloom
Chief executives from VW, Peugeot-Citroen, GM Europe and Ford Europe didn’t dispute this gloomy outlook in statements to journalists during the Paris show. Investment bankers, who had been on the receiving end of presentations from all the big car manufactures before the show opened, were pondering sales forecasts nervously and trimming profit predictions.

General Motors chief financial officer John Devine pointed to a deeper European malaise, saying if costs were not brought under control and the European Union persisted in bureaucratic over-regulation, the whole manufacturing business might close down and move on.

Gutting effectiveness
“If the present trends continue we won’t be in the manufacturing business, not only in autos, but in other businesses as well. We will be importing them from other parts of the world, probably Asia. The combination of these factors is really gutting the effectiveness of the European manufacturers and reducing their profitability. Over time that will reduce their inclination to manufacture in Europe and I’m pretty sure that’s not good for Europe,” Devine said.

Bernd Pischetsrieder, chief executive of Volkswagen, wasn’t quite so melodramatic, but was still pessimistic. In an interview with Paris newspaper Les Echos, Pischetsrieder said the Western European car market would show no growth next year. He also said the Western European car market this year would be “more or less stagnant”.

Meanwhile, Japanese companies like Toyota and Honda were upbeat, raising their estimates for market share in coming years.

There does seem to be an unnerving conglomeration of bad news for carmakers.

Steel prices rising
Prices for raw materials like steel are heading upwards, vehicle prices are being forced down by a combination of soggy sales and intense competition, while economic growth forecasts point to anaemic conditions in Europe’s largest markets. Demand for cars has stalled in Germany, Europe’s biggest market, as unemployment remains high and consumer confidence weak.

At the same time, competition from Japan and Korea is ratcheting up to an even higher intensity, and threatens to capture most of any marginal increase in sales across Europe as they fill gaps in their product portfolios, add more diesel engines, and classier designs.

The chronic loss makers like Ford Europe, GM Europe and possibly Fiat are about to close more plants in an effort to cut costs and clear the path to profits, someday.

Fingers crossed
GM Europe’s chairman Fritz Henderson is known to be huddling with his lieutenants and promises to unveil a plan within a couple of months to cut the flab from the organisation. Workers at GM Europe’s Opel, Vauxhall and Saab subsidiaries will be keeping their fingers crossed that it won’t be their plant which is closed. GM Europe president Carl-Peter Forster also said at the show that the company was seeking a big reduction in its European wage bill to help reverse the $3 billion in losses incurred in the last 4 years.

Ford seeks cost cuts
The news from Ford Europe was equally ominous. Lewis Booth, Ford Europe chief executive said he was seeking cuts of hundreds of millions of dollars in purchasing costs in 2005, because of rising prices for raw materials, mainly steel.

“The customer isn’t prepared to pay more for cars, regardless of what’s going on in the commodity end of the business,” Booth told CNBC TV.

Ford is also struggling to stem losses at its Premier Automotive Group (PAG), mainly caused by Jaguar’s falling sales in the U.S. Jaguar recently announced a plant closure in Coventry, while PAG’s Land Rover has also been forcing its employees into new cost cutting and efficiency improvements.

Ford Europe has lost about $7 billion since 1990. Losses and write-offs reached close to $1.8 billion in 2003.
Jean-Martin Folz, chief executive of PSA Peugeot Citroen, joined in the new mood of brutal honesty, saying burgeoning rebates were cutting into profitability and making car market conditions difficult.

Flat; no sign of rebound
“The market is flat this year and particularly weak in France and Germany. We see no signs of a rebound,” Folz told Bloomberg News.

But it was all smiles over at the Japanese stands.

Toyota, Japan’s biggest carmaker, raised its European sales target for 2004 to over 900,000 from its previous target of 860,000. Its target for 2010 remains 1.2 million.

Honda of Japan raised its sales forecast for 2004 to 250,000 from the previous goal of 240,000 and expects to raise this to 280,000 in 2005. This compares with 217,000 in 2003.

According to Deutsche Bank, Japan’s share of the European market, which it put at 13.6 per cent in August, is starting to slow down, but it won’t be long before it starts to accelerate again. Japan’s market share in 2001 was just over 10 per cent, according to Automotive Industry Data.

Japanese, Koreans
“With new capacity being built by Toyota in Europe, and with new diesel engine capacity being introduced by nearly all the Japanese car makers, we believe that the Japanese OEMs’ share of the European market will continue to rise over the next few years,” Deutsche Bank said.

Korean cars account for about 3.8 per cent of Europe’s car sales. In 2003, Korean manufacturers had 3.5 per cent of western Europe car sales, up from 2.9 per cent in 2002, data from the European Automobile Manufacturers Association (ACEA) shows.

Investment bankers reel
Meanwhile investment bankers at the show were reeling from the negative presentations given to them before the show began.

Morgan Stanley believed that savage cost cutting plans by the manufacturers reflected the dire competitive environment, and declared that the market for European car sales was stagnant.

“(Manufacturers) thoughts appear to be lingering on urgent issues of labour reform in Germany and the inexorable march of Asian competition into once-protected, yet disappearing, bastions of domestic brand loyalty,” Morgan Stanley said.

Goldman Sachs said it was hard to find reasons for optimism in 2005, and reckoned that sales will inch ahead next year by about 1.4 per cent to 14.7 million. These comments were made before news that sales in Germany, Europe’s biggest market, dived by 4 per cent in September.

Ferrets in a sack
Goldman Sachs also worries that any sales increase will simply be grabbed by the Asian producers, leaving the Europeans to fight like ferrets in a sack for the remaining scraps.

Goldman Sachs believed that manufacturers were also worrying about hefty new model development costs.

“This, together with the pessimistic outlook for markets, perhaps explains the generally downbeat tone of many managements for the coming year,” Goldman Sachs said.

“No OEM (at pre-show presentations) forecast an improvement in the European vehicle market. In fact, most seemed concerned that, while the U.K. appears to be slowing, neither France, nor Germany is demonstrating any signs of life. We believe that this pessimistic outlook will form the basis of corporate planning for 2005 and do not expect any positive signals when managements begin to communicate the outlook for 2005 towards the end of October,” Goldman Sachs said.

There’s some good news – for the French
Goldman Sachs did, however, have some words of encouragement for the industry, albeit the French part of it.

“The sheer excellence of new French products highlights the strength of the French OEMs at present. The Peugeot 1007, Citroen C4, and Renault Modus all look exceptional products in our view. Their standards of fit and finish, interior plastics and electronic features are a rival for anything VW currently offers. They also offer more adventurous styling and are manufactured at much lower cost than VW,” Goldman Sachs said.

This doesn’t augur well for the rest of the competition, and VW, Ford, and GM’s Opel/Vauxhall are in the eye of the storm.

“There is a bit of a squeeze on the traditional European manufactures, with Volkswagen trying to renegotiate its social settlement with powerful unions, and its even worse for GM and Ford’s chronic loss making European subsidiaries,” Manchester University’s Williams said.

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