Prospects for the European car market in 2003 are clouded by worries over low economic growth and fragile consumer confidence. Germany looks particularly weak. Neil Winton reviews a selection of investment banks’ latest projections for the market and their views on winners and losers.

Car sales in Europe fell off a cliff in January, underlining predictions by investment bankers that up to half a million fewer buyers will do showroom deals in 2003. Potential buyers are shying away from committing themselves to expensive new cars because of worries about the economy, and fears that war will break out with Iraq and spiral out of control.

Stock markets are crashing around the world, and automotive companies are taking their share of the flack as investors sell up and retreat to the sidelines. Even falling stock markets have their uses; they are almost infallible leading indicators of economic activity. Markets are betting that Europe will be an extremely tough place to sell cars in 2003.

According to Deutsche Bank, European auto shares have fallen by around 15 per cent in the last three months, but still may have some way to go before bottoming out.

“2003 still presents some significant risks in terms of weak pricing, poor macro backdrop, falling sales and further deteriorating dollar exposure. Automotive shares may therefore have to get cheaper still before we could be comfortable in calling a buy on the sector,” Deutsche Bank said.

The latest sales evidence makes this seem like prescient advice.

Worst month follows best month
“After the best month ever, the worst in five years,” said JD Power-LMC in its report on European car sales in January.    JD Power-LMC said sales in January were at an annualised rate of 13.7 million cars, worse than any month since 1997. Deutsche Bank data backs this up.

“With Italy down 15 per cent, Spain minus 6 per cent and France minus 9 per cent, the start of 2003 was weak in Europe. We expect a 6 per cent decline for whole of the first quarter. On top of this weak demand, OEMs (big manufacturers) are complaining about intensifying pricing pressure,” Deutsche Bank said.

Investment bankers in Europe, like Deutsche Bank, Commerzbank, Merrill Lynch, Salomon Brothers and Morgan Stanley are slashing their European car sales forecasts for 2003.

Deutsche Bank is most pessimistic on 2003 outlook
Deutsche Bank is the most pessimistic, forecasting a fall of 3.4 per cent in 2003. Salomon’s minus 1.8 per cent is the least gloomy. Commerzbank reckons sales will fall 3.1 per cent, and Merrill Lynch sees a slide of 2.5 per cent.

Despite the worrying overall prospects, luxury carmakers BMW and Porsche are still favoured by investors as companies most likely to succeed despite weak markets. Of the mass manufacturers, Renault gets admiring nods. Peugeot, long a stock market favourite, is starting to receive less than enthusiastic reviews about its future. VW faces troubled times.

Deutsche Bank calculates that 2003 sales in Europe will fall 3.4 per cent to 13.9 million, a loss of almost 500,000 from 2002. Morgan Stanley predicts sales will slip to 14.1 million.

GDP growth undershoots crucial growth rate
Deutsche Bank economists believe Europe’s Gross Domestic Product will grow by 1.2 per cent in 2003, better than last year’s 0.7 per cent, but not enough to reach the crucial 2 per cent growth rate, the level the auto industry needs to maintain sales, compared to the previous year.

A weak Germany is the biggest problem. “Our strategists expect negative GDP growth in Q1, mostly attributable to Germany, and only 1.2 growth in euroland for the full year,” Deutsche Bank said.

New product boost makes second half better
Deutsche Bank believes the first half of 2003 will be worse than the second half, with car sales crashing 5 per cent in the first six months, and only skidding 2 per cent in the second half.

“This will partly be a result of an expected improvement in economic conditions, but sales should also receive a boost from an increase in the number of new product launches expected in the second half of the year,” Deutsche Bank said.

New models expected to have eager buyers rampaging through dealerships later this year include the Jaguar XJ, the BMW “5” series, the Bentley MSB, the Smart roadster, the Peugeot 407, the VW Golf, the Renault Megane Scenic, and the Citroen Pluriel.

Mid-East fallout troubles Merrill Lynch, but Merrill likes Renault
Fallout from troubles in the Middle East could hit European sales. The knock-on effect on prices will damage the balance sheets of the big manufacturers, according to Merrill Lynch. “We expect the European market to become more challenging during 2003 as consumers rein in big ticket spending over economic concerns and a potential war with Iraq. In response, pricing competition should intensify with higher incentives limiting the decline (in sales) to 2.5 per cent. Higher oil prices, at least in the short term, will continue to favour diesel sales,” Merrill Lynch said.

“Further pricing pressure and lower volumes does not bode well for the volume manufacturers,” according to Merrill Lynch.

Merrill Lynch recommends investors buy Renault shares because of its significant new products, and its alliance with Nissan of Japan. BMW and Porsche also get the buy nod from Merrill.

Commerzbank thinks German market will fall and says the gloss is coming off Psa
Commerzbank has downgraded its European sales forecast for 2003 to minus 3.1 per cent from down 1.5 per cent, which it made in November. Europe’s biggest market, Germany, has been downgraded to show a 1 per cent fall in 2003, after an earlier forecast of 1.2 per cent growth.

And Commerzbank says the gloss is coming off Peugeot. “Peugeot has successfully taken market share in Western Europe over the last few years with well-timed and well-regarded new products. However into 2003, the group (Citroen and Peugeot) is likely to lose momentum as competition increases,” Commerzbank said.

Reports that Peugeot is contemplating an expensive return to the US market, which it left under a cloud 12 years ago, won’t endear the company to investors.

“BMW remains our favourite pick in the sector, although we appreciate the short-term outlook should remain depressed. We believe the group will show its strength as the year progresses,” Commerzbank said.

VW faces a worrying scenario, according to Commerzbank, because of a number of structural issues it faces in the near-term. “VW is the most exposed auto stock to the Western European volume markets, on which we are taking a more cautious stance. The weak economic environment in Western Europe and the US increased pressure on the group in the final quarter, with VW reporting sales in line with its lowered guidance of just under 5 million. We expect 2003 to be difficult again,” Commerzbank said.

News in early February that VW announced a recall of 850,000 cars won’t help. The recall included VW Golfs, Jettas, Beetles, Passats, the Skoda Octavia, Seat Toledo and Leon, Audi TT, A4 and A6.

Possible company car tax changes add to German gloom
German sales are not only being undermined by economic weakness. The proposed change in personal taxation on company cars is also contributing to the problem, with Berlin planning to increase the tax to 1.5 per cent of the list price from 1 per cent.

BMW CEO Helmut Panke has said that if the tax is increased, it will cost the industry in Germany between €3 billion and €5 billion in lost sales. According to Deutsche Bank, resistance against the tax is growing in Germany.

Berenberg Bank of Hamburg believes the tax will not go ahead, with the German upper house, the Bundesrat, rejecting the measure at a decisive session on March 14. Merrill Lynch also believes that the tax is likely to be scrapped, but that this won’t help much.

“It is likely that the proposed tax change will either be substantially watered down or scrapped altogether. Either way, given the bleak outlook for the German economy, we do not see any short term upturn in new car sales in 2003 and forecast a further 2 per cent decline in sales,” Merrill said.