The Euro was successfully launched on 1
January 1999 bringing the so-called ‘Euroland’ countries (Germany, France,
Italy, Spain, Portugal, Finland, Eire, The Netherlands, Austria, Belgium and Luxembourg)
under the umbrella of currency unification. Although Euro notes and coins will not be
introduced until January 2002, the primary goal of the Euro, to create a single
low-inflation economy with a more stable and resilient currency, is now well underway.

The impact on the European motor industry
in the long term is forecast to be substantial, with a widely held belief that consumers
and government regulators will no longer be willing to accept prices that can vary by up
to 60% from country to country. In the UK, Europe’s most expensive market, some
legislators have stated that manufacturer and dealer chiefs should be jailed for
overcharging car buyers. If this is the case then things may well have to change fast,
since a recently released EC study revealed that 57 out of 76 of the best-selling models
cost far more in the UK than in any of the other 14 member states.

Certain British motor analysts feel that
car prices will not necessarily come down to the levels of the cheapest countries. Rather,
they predict prices will converge somewhere in the middle. Price uniformity should benefit
auto manufacturers and dealers as much as consumers. It does not necessarily mean a
collapse in prices for manufacturers; it could simply mean a more consistent Europe-wide
strategy rather than current situation whereby manufacturers adjust their cost prices in
line with the individual countries’ sales tax. Theoretically, harmonization of taxes
could lead to potentially lower cost prices to dealers in countries with low sales tax
rates such as the UK and Germany, but raising cost prices that have historically been very
low in countries with high car taxes. Indeed, an end to subsidized pricing in countries
like Denmark with car taxes of 180% should actually force harmonization of car taxes in
Europe. European auto manufacturers must change or suffer the consequences. The Japanese
are among the first volume makers to react, with both Nissan and Toyota, stating that they
will make their specification packages in Europe more uniform.

Other Euro issues centre on the impact of
cross border price transparency driving down new and used car prices in the UK. A recent
study warns that residual values could be reduced by 6% over the next two years in line
with current UK and Continental car price differentials. Both new and used vehicles prices
will be affected. Long term fleet agreements will be particularly vulnerable to the change
in residual values. However, contrary to this view, the ‘Cap Used Prices Guide’
is predicting that the Continental countries’ adoption of the Euro will have little or no
impact on UK stock values.

European consumers should now be able to
begin comparing prices across the eleven participating countries as most car-dealers start
stating their prices in both the national currency and the Euro. Britons can, in theory at
least, enjoy the advantage of price transparency to get the best bargain in choosing a car
long before euro notes and coins begin circulation as the sole currency in January 2002.
Alan Pulham, director of the National Franchise Dealers’ Association in the UK, does not
expect there to be a huge surge in cross-border trade, largely because it’s still
extremely cumbersome (although becoming increasingly easier for UK purchasers) to buy a
car, left-hand, let alone right-hand, in mainland EU. He feels that it will at least put
public pressure on the manufacturers to be more transparent about their pricing within and
outside of the Euroland.

Automotive manufacturers have historically
partly justified price differences by citing different exchange rates and specification
packages across Europe. Indeed, customers generally demand higher base-model
specifications in Germany than in Spain. But other factors contribute to the differences.
In the UK, for example, high specification levels are created for the fleet market, which
accounts for up to 70% of sales. A basic specification for private buyers in the UK is the
equivalent of a luxury specification in some other countries.

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By GlobalData

Current cross border experiences in
mainland Europe may not uphold a belief of transparent trading. Dealerships lying in the
lowland countries of Belgium and Netherlands sit in the middle of a band where 35 million
Europeans already use several currencies on a daily basis. It is felt that even here, six
months after the introduction of the Euro, there has not been a noticeable increase in
cross-border sales since local dealers believe that the Dutch, German and Belgian buyers
all want different specifications of cars. For instance, Belgians don’t want two airbags
and ABS as standard, unlike the Germans. In other words, a pan-European harmonized car may
not be what customers want and will always pay a differential for the luxury of choice.

Against the speculation, one certainty is
that the Euro will eliminate exchange rates as an excuse for high prices.

Probably the biggest effect of the Euro
introduction for automotive dealers, at least in the short term, is the adequate
introduction of suitable information systems to deal with both suppliers and customers
alike. Certain UK companies, despite the UK’s failure to take up the new currency,
are already tasked for its arrival. The Tyneside-based motor group, Benfield, has stated
that it will be dealing in the Euro if customers ask to. On the supplier side, Volvo is
planning to switch its group accounts to the Euro on 12 January 2001, but it began
demanding payments in the single currency from Euroland suppliers from 1 January of this
year. The Fiat Group and DaimlerChrysler have also adopted the Euro from the start of the
year as their corporate currency although other Euroland carmakers will probably wait
until 2001 or 2002.

Undoubtably, the Euro will eventually have
some form of marked impact on all automotive dealers. Whether it will have the far
reaching upheaval of an establishment of a perfectly transparent Europe-wide market has
yet to be seen.

Paul Anderson, Deloitte & Touche
Corporate Finance, London