Alarm bells are ringing in Germany about the prospects for the new Volkswagen Golf and Opel Astra, but some industry experts believe scepticism is premature and that overall sales in this small family car sector will eventually be solid. Neil Winton hears the views of investment bankers and analysts.
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Sales of traditional so-called C segment hatchbacks though are expected to fail to meet the huge numbers achieved in the past, but overall production figures are likely to be boosted by new niche vehicles like compact MPVs, high roof seven seat “station wagons” and even SUVs built on the same platforms.
Competition is cranking up from above and below. Luxury car manufacturers like BMW and Mercedes are pushing down market seeking to boost volumes. After destroying sales of large executive cars like the Ford Scorpio and Opel/Vauxhall Omega, and humbling the Ford Mondeo/Opel Vectra sector with its “3” series, BMW is about to mount a new attack with its small “1” series car, which will go head to head with more expensive Golfs like the upcoming new GTI. The BMW “1” series will be launched in September. The little Mercedes “A” class is already competing in this sector.
Smaller, cheaper cars are squeezing up from below, with mini MPVs like the Opel Meriva and Honda Jazz offering such flexibility and driveability that buyers feel they can spend less money without conceding much, if anything to the larger more expensive Golfs, Astras, Renault Meganes, Peugeot 307s, and the Ford Focus.
No fistfights reported
Reports from Germany suggest that potential buyers of the new Golf V are not exactly fighting among themselves for the right to drive away the new car. The dread “I” word – “incentives” – is already being heard, even though the Golf rollout across Europe is still going on. Some reports suggest that incentives are even available on the new Astra, although it has not yet reached showrooms.
This makes no sense to Mark Fulthorpe, analyst with CSM Worldwide. “This seems peculiar, to be hitting the ground running with incentives. That would be a first for the Golf. I prefer to give the vehicle another six months. We heard the same thing with the VW Touran (compact MPV built off the Golf V platform) and even the Porsche Cayenne. The Cayenne supposedly wasn’t shifting in America but after a few glitches with early iterations they got the issues sorted. I expect the same with the Golf,” Fulthorpe said.
Golf sales slow
But the reports persist. Investment banker Merrill Lynch said Golf sales were slow in Germany, where the car was launched in late October. There are reports that dealers are offering 1,000 euros in incentives already to move the cars. According to a Merrill Lynch survey of 16 dealers across Germany, undertaken on January 23, 2004, sales were between 10 per cent and 30 per cent less than factory allocated volume.
Merrill Lynch said high prices were to blame. “Why has the launch been slower than expected? Our survey reveals that a large part comes down to price,” said Merrill Lynch. Merrill Lynch said although the entry level Golf and the cheapest new Astra were priced almost identically, the Golf became almost 2,000 euros more expensive when equipped at the same level as the Astra.
Can VW charge premium prices?
“Does Volkswagen have the brand equity to charge a Mercedes-like premium in a segment that is highly price sensitive? This was possible in the past, but may not be today, which partly explains the 1,000 euro incentive from January 1 this year,” said Merrill Lynch.
VW admitted it had lost production as it ramped up production of the new Golf, but reiterated its production target of 600,000 for 2004.
Incentive war in Germany
Another investment banker, Morgan Stanley, believes difficulties selling the Golf and Astra mean that a new car incentive war has begun in Germany. “Like a prize fighter punching before the first round bell, Opel is trying to woo customers away from VW showrooms to wait over three months for its important new Astra,” said Morgan Stanley’s Adam Jonas in a report.
The report also said that the scrap boiling over in Germany points to a weaker overall Western European market in 2004. Morgan Stanley predicts a mere 0.5 per cent growth this year. Other forecasters are slightly more optimistic. CSM talks of a “small upturn”. J.D.Power-LMC Automotive Forecasting expects 2 to 2-1/2 per cent growth.
Nigel Griffiths, auto analyst with Global Insight, like Fulthorpe, is sceptical about problems with the new Golf, which has been praised by motoring journalists for its quality, ride, and handling, but criticised for a lack of adventure in its rather repetitive styling.
No hard facts
“There is definitely a wave of concern coming out of Germany, but I’m not sure how well founded this is, but so far there are no hard facts on this at all,” Griffiths said. Griffiths believes that the Golf will be successful long-term, not least because the car has a strong long-term customer base which can be relied on to repeat buy. He also said that VW has been trying to raise the prices it charges by concentrating on build and interior quality and seeking to build up its brand equity.
“Is it possible for mass market brands to achieve semi-premium status? VW thinks that it can attain that,” Griffiths said.
Price cuts possible
But if the current prices turn out to be too high for consumers to stomach, VW might be prepared to cut them when later Golf versions appear. VW is expected to launch a “high roof” version of the Golf next year, which will have up to seven seats. It will be similar to the Peugeot 307 SW (for station wagon) and will replace the Golf IV estate car. An SUV based on the Golf is also on the cards.
Al Bedwell, auto analyst with J.D.Power-LMC Automotive Forecasting, agrees that Golf prices might be high now, but this might be part of VW’s strategy.
“Prices are said to be high. It sounds like they have pitched it high and are not getting away with it. I don’t know if this strategy has been built in, but maybe VW foresaw a discounting war. It can then discount, but still make money,” said Bedwell.
Segment to shrink
Global Insight’s Griffiths is concerned though about the future of the overall segment. “Astra and Golf have lowered (whole life) sales targets. In this industry usually sales targets were set to match the previous model or get better. Now they are saying that previous peaks were exceptional, and the market is more fragmented, so that sales volumes would be at least 10 per cent below previous peaks. But lower sales targets should mean better profit margins as there is less pressure on dealers to move the metal,” said Griffiths.
Product diversity
CSM’s Fulthorpe believes that despite falling sales for traditional hatchbacks – the C segment accounted for 30 per cent of the overall market in 1994, and only 22 per cent today – overall sales might in fact account for about 30 per cent because of the greater diversity of products being made based on the same platforms.
“The traditional concept of the C segment is going to be less and less important, will account for less and less of the mix. But by bringing forward a diversity of products on that size of platform including all wheel drive, SUVs, and crossovers, it will lead to an expansion of production,” Fulthorpe said.
“Looking at VW, Renault-Nissan, the European arms of Ford and GM, this is pretty much going to be their attempt to avoid the squeeze from above, and the threat from the Koreans from below,” he added.
Ford Focus opportunity
All this apparent turmoil concerning the Golf and Astra poses problems, or maybe a tasty challenge for Ford, which will launch its new Focus later this year, according to Global Insight’s Griffiths.
The Astra and Golf have been criticised for bland, unadventurous styling. Ford’s Focus wowed buyers with its styling when it was first introduced and Ford had been expected to launch its restyled Focus in September. But its introduction has been delayed for about three months and it may not now appear until early 2005.
“Ford might be thinking, these (the Golf and Astra) haven’t taken off like lightening. If there was a killer product out there, we would be stuck, but if the direct competitive product hasn’t taken off, there’s a big opportunity,” added Griffiths.
Estimated West European sales volumes (000’s) | |||
2002 | 2003 | %ch | |
VW Golf | 596 | 495 | -17 |
VW Bora | 64 | 44 | -31 |
VW Touran | 0 | 92 | n/a |
Total | 660 | 631 | -4 |
Opel/Vauxhall Astra | 438 | 350 | -20 |
Opel/Vauxhall Zafira | 242 | 224 | -7 |
Total | 680 | 574 | -16 |
Source: Industry sources | |||
