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  1. Analysis
March 7, 2003

Geneva lacklustre as industry braces for war

It doesn’t matter how good a new car is, consumers probably won’t be buying if they fear a war is about to break out, and they certainly will not if hostilities explode. Europe’s carmakers were putting on a brave face at the annual Geneva Car Show, but none of the scenarios they currently face is very attractive. Neil Winton reports from Geneva.

By bcusack

It doesn’t matter how good a new car is, consumers probably won’t be buying if they fear a war is about to break out, and they certainly will not if hostilities explode. Europe’s carmakers were putting on a brave face at the annual Geneva Car Show, but none of the scenarios they currently face is very attractive. Neil Winton reports from Geneva.

If by some miracle, the threat of war in Iraq is averted and it is business as usual, car sales in Western Europe are expected to fall by up to about 5 per cent in 2003. That means around 700,000 fewer cars will be sold. And that is the favourable scenario.

If there is a war in Iraq and oil prices zoom, PSA Peugeot-Citroen Chairman Jean-Martin Folz warned in Geneva that sales could crumble by as much as 10 to 15 per cent, with potentially more than 2 million potential buyers keeping their hands in their pockets and their bodies away from car dealerships.

In 2002, car sales in Western Europe totalled 14.4 million, according to Automotive Industry Data.

Soured relations danger
BMW Chairman Helmut Panke also expressed concern that recent soured relations between Chancellor Gerhard Schroeder and the US President George W Bush might turn American buyers against German products.

“In the interest of the German automotive industry and in the interest of our companies, it is essential to overcome the tension that has now come to bear on German-American relations which, by tradition, have always been good. Whilst we currently do not see any dramatic effects on our business, ongoing tension and misunderstandings may leave their mark on business relations and endanger jobs,” Panke said in a speech in Geneva.

Panke also launched what some observers interpreted as a thinly veiled attack on Schroeder’s decision to seek to block direct military action against Iraq. This was said to be making it more difficult for the U.S. to impose its will on Iraq and was lengthening the time that the crisis might last.

Panke opened his speech saying that this was a year of global political upheaval.

“Naturally, we all hope that the crisis will be solved quickly,” Panke said.

Chancellor Schroeder’s anti-war stance has led to criticism that Iraq may be encouraged to obfuscate endlessly in the hope that action could be avoided and U.S desire for a quick outcome blunted. This, these critics say, would extend the crisis, cripple consumer confidence and economies, and harm businesses like BMW’s.

Ford Executive Vice-President David Thursfield echoed the concern being expressed by industry leaders.

“Any kind of geopolitical uncertainty would upset the market. Clearly this period of uncertainty is cooling the market right now,” Thursfield said.

Weak dollar threatens Germans
There is another, parallel threat to German carmakers and a corollary of the tension surrounding Iraq: the weak dollar. According to Deutsche Bank, the dollar will now fall to €1.20 at the end of the year, compared with its previous forecast of €1.15.

The Renault Scenic II

“We have also amended out forecasts for $/Yen exchange rates from 120 to 117 at the year-end. It goes without saying that the continual weakening of the dollar versus both the Euro and the yen does put additional pressure on those auto makers (VW, BMW, Mercedes, Porsche) who sell vehicles in the U.S. and we would highlight once again the risks to the German manufacturers in particular from such trends,” Deutsche Bank said.

On the eve of the Geneva show, Porsche, the world’s most profitable car maker, said it would cut production of its 911 and Boxster models from March due to weak demand in the U.S., and Germany. Porsche said this was mainly due to short-term factors like recent bad weather, although it admitted that demand was weakening.

Deutsche Bank summed up its opinion of the prospects for the car business by recommending investors sell shares in GM and Ford, and component makers Delphi and Visteon.

Low-key show
New products being unveiled at the show for the first time were suitably low key. The last big industry show, in Paris last September, had some new products which set pulses racing, with debuts from Porsche’s new Cayenne Sports Utility Vehicle, the BMW Z4 roadster, the all-aluminium Jaguar XJ, and the smaller Bentley. If that didn’t raised your heart rate, maybe Miss Kylie Minogue unveiling the Ford Streetka small roadster did.

No such excitement in Geneva. Headline new products included worthy cars like the Renault Megane Scenic compact MPV, and two little Fiats – the Gingo and the Idea. The Gingo replaces the old Panda and Seicento. The Idea is a mini MPV based on the Punto.

Audi updated its A3 small family car. GM’s Opel unveiled the big Signum, the latest attempt by a mass car manufacturer to venture into BMW and Mercedes territory. The Signum is based on the Vectra, but offers much more luxury and space, along the lines of Renault’s Vel Satis. The Signum will probably find sales just as much of an uphill struggle as the Vel Satis has.

The Opel Signum

Renault’s understandable smugness
Ford and VW unveiled their new compact MPVs – the Ford Focus C-max and the VW Touran, seven years after Renault introduced its first Scenic to trail-blaze this sector. Renault Chairman and CEO Louis Schweitzer could be forgiven a little smugness while unveiling the second-generation Scenic II “…….whilst our competitors are still focussed on their first generation vehicles.”

Renault made fat profits selling huge numbers of Scenics while the competition flailed around for a response. The Scenic II is unlikely to be able to repeat this for Renault. Schweitzer also presented the Megane Coupe Cabriolet.

Saab took the covers off its new 9-3 convertible.

Markets tottering
But it is not just competition that will be worrying car manufacturers in coming months, it is the anaemic state of the markets, and their startling downward plunge.

Industry researcher J.D.Power-LMC, in its latest statistical bulletin, now reckons that Western European sales in 2003 will fall 5.3 per cent. This compares with estimates from investment bankers just a month ago pointing to a fall of between 1.8 and 3.4 per cent.

“Sales have clearly been depressed by the host of uncertainties – many relating to the Iraq conflict, whether directly or via the impact of higher oil prices, that have been weighing on consumer confidence,” J.D.Power-LMC said.

February’s sales were the worst since 1997
“This low outcome is in line with recent falls in consumer confidence throughout the region. Sluggish economic growth, fears of war, and rising oil prices are combining to keep car demand subdued,” according to JD Power-LMC.

Economic outlook grim
Late last month investment banker Morgan Stanley slashed its world 2003 Gross Domestic Product growth forecast by 0.4 of a percentage point to 2.5 per cent, and trimmed its 2004 estimate to 3.8 per cent from 4.0 per cent.

The Saab 9-3 Convertible

Morgan Stanley was even more pessimistic for Europe. “…….Europe, where we have lowered our growth estimates to just 0.8 per cent in 2003 from 1.2 per cent and to 2.3 per cent in 2004 from 2.6 per cent.”

“With year-over-year growth rates expected to hold below 1 per cent in the second half of 2003, Europe emerges as the new weak link in the global growth chain,” Morgan Stanley said.

Morgan Stanley does have some optimism genes though. “Yet an upside surprise cannot be ruled out – especially if the war goes well, geopolitical tensions subside, oil prices plunge, equity markets rally, and confidence is restored; we would then do an about-face and revise our forecast upward,” the bank said without a hint of irony.

Bad practices coming home to roost
Industry experts worry that the underlying long-term health of the carmakers has been undermined by a determination to keep production lines running at all costs, with profitability coming a poor second to output. Price cutting and expensive incentives have succeeded in keeping factories working at near to capacity, but have pulled sales forward and almost destroyed profits.

Chronic overcapacity has meant that only the newest cars are, ever more briefly, able to command healthy profit margins without help from price discounts, incentives or cash-back schemes.

“Walking around the Geneva show, you can see that the industry is shell-shocked; it’s attempting to put a brave face on things, but the outlook is, simply, bad,”  said Mike Wattam of automotive consultants Mike Wattam and Associates.

“People have been persuaded into buying and dragging sales forward. This risks a sudden drop in sales, like we are seeing in the U.S. now,” Wattam said. Private buyers, who generate bigger profit margins, are likely to suddenly disappear from the market, leaving only low margin business purchasers, according to Wattam.

“The biggest sufferers will be those companies with the oldest product line-ups. Even BMW will struggle, but the big losers will be Fiat, the likes of Daewoo (now owned by GM) and the bread-and-butter Asians, and Rover. Ford will find things a bit rocky to, except for the Fiesta.

Frankfurt may sparkle
The next big auto show in Frankfurt next September is likely to make much more of an impact with the public with the important new BMW “5” series, BMW “6” series coupe and BMW X3 small SUV. VW will parade its new Golf, and Peugeot is expected to show the 407.

The industry will be crossing its fingers that hostilities are over and hoping for business as usual.

Meanwhile, the Geneva car show runs until March 16.

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