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October 7, 2004

UK: ANALYSIS: Forecasters have capacity concerns for Europe

SupplierBusiness.com talked to the leading global forecasters to find out where they see 2004 headed, in terms of total industry volume in Europe. The forecasters discuss capacity utilization, implications of model mix, and the impact of rising materials prices.

By bcusack

SupplierBusiness.com talked to the leading global forecasters to find out where they see 2004 headed, in terms of total industry volume in Europe. The forecasters discuss capacity utilization, implications of model mix, and the impact of rising materials prices.

Global Insight: Western European production flatlining, but rising material costs not expected to impact demand

Total industry car production in Western Europe is flatlining, according to Nigel Griffiths at forecasters Global Insight. “It doesn’t mean that it’s got a cardiac condition, but basically if you look at seasonally adjusted production rates, it has been remarkably stable since the late summer of last year”, says Griffiths.

Production has stayed stable at an annualised 14.9m passenger cars in western Europe overall, with increasing exports off-setting the losses in the domestic market caused by relatively weak demand and growing import competition.

Export growth has been up due to fresh products, such as the BMW X3, volume growth for the Volvo XC90 and the Volkswagen Touareg and Porsche Cayenne models.

Griffiths is optimistic that exports will continue to support production into 2005.

Exports to North America have been largely hedged for the German manufacturers, says Griffiths, and the hedges “don’t start to unwind until the second half of the next year”, so the pricing need not be changed until then.

Global Insight expects production of new cars in Western Europe to grow in 2004 and 2005. Some of the potential weakening of exports in 2005 is expected to be taken up by European demand – the European economy is expected to see faster economic growth in 2005.

One potential threat to European production volumes in 2005 is higher raw material costs feeding through into new car prices, which could depress demand.

Griffiths says that the additional increase in raw material prices will have some effect on car prices, but that in the current compe titive market environment, it would be difficult for car makers to pass price increases on.

Griffiths says that in Western Europe pricing growth has fallen back to a third of the rate of inflation – real car prices are declining. “On top of that you’ve got very strong incentives and discounting”, he says. The growth of Toyota and the Korean manufacturers in the European market will help to cap the room for price increases.

Griffiths says that overall, rising raw material and oil prices are likely to have a relative minor impact on prices in the marketplace, and therefore are likely to have only a small impact on demand.

“By the time [higher costs] get right through the supply chain, it’s actually quite a small number”, says Griffiths. “You would have to have a very large customer elasticity to get a bit dent in the market”.

PricewaterhouseCoopers AUTOFACTS: BMW and DCX grow while Fiat and MG face declines

Within the European production total the biggest gains are expected to be made by the BMW group, according to Michael Gartside at PwC AUTOFACTS.

The addition of the BMW 1 Series is expected to provide a 15.8% growth in 2004, and another 12.3% in 2005. DaimlerChrysler is also sees strong gains in 2004 and 2005.

Rising small car production at Smart will boost DaimlerChrysler volumes.
Smart is expected to account for almost 230,000 vehicles in 2005, compared with 127,400 in 2003.

PwC also expect Porsche to continue to grow their volumes with their renewal of the Boxster.

One of the losers is expected to be the Fiat group, with the Fiat brand itself taking the brunt of the decline. Fiat brand production is expected to fall below the 1m mark in 2004 to 963,000, and fall further to 938,000 in 2005.

Among the other manufacturers Honda is at a weak point in its model cycle in Europe, and will see a drop in production, while the MG Rover group’s failing model range is expected to result in a decline in vo lumes by over a quarter between 2003 and 2005, says PwC AUTOFACTS.

Polk Marketing Systems: Continuing price pressure and GM capacity review

Thomas Mawick, Autos Analyst at R L Polk Marketing Systems in Germany, expects growth in west European production increase of 2.4% in 2004. “Shipments of German car producers to the US will face a slight decrease this year”, says Mawick, but “export dynamism to Asian and east European markets are still tending to pick up”.

Mawick is forecasting a further increase of production to 15.32m units in western Europe in 2005, again driven by exports. Mawick says the that the proliferation of new models across more and more segments and niches means that “price pressure will at least continue, if not sharpen”.

“Low consumer confidence will certainly not help”, he says.

Mawick expects that GM Europe will need to review its capacity. Even in the Astra, although “a very good car”, will p robably face relatively low demand as “the compact segment is characterised by a full model offering and extensive competition”, says Mawick.

CSM Worldwide: Light commercial vehicle production moving to eastern Europe

Mark Fulthorpe, director, European vehicle forecasts at CSM Worldwide, identified a shift in light commercial vehicle production to central and Eastern Europe as one of the biggest changes affecting the industry in Western Europe in 2004 and 2005.

Ford has shifted some of its full-sized Transit production from Genk to Turkey and the growth of the Transit Connect, which is only produced in Turkey, is adding to the volume shift.

In addition Volkswagen is producing its new Caddy van at Poznan in Poland.
“Poznan is also taking on some of the sourcing of the T5 [Transporter] van”, says Fulthorpe.
Within Western European car production, Fulthorpe agrees with other analysts that Fiat faces the biggest challeng e. “Fiat stands to lose the most” production volume in 2004 and 2005, says Fulthorpe.

Fiat is almost out of the D segment, he says, with just the Alfa 156 left competing in the upper-medium part of the market.

Further down the market “Fiat is under pressure, not just from the growth of DaimlerChrysler and BMW in the C-Segment, but also the growth of Toyota”, he says. “It is going to take them into a head-on battle in the B and C segment”.

Fulthorpe says that the “remarkably resilient” performance of the Ford Focus as it approaches run out is also a challenge to Fiat.

JD Power-LMC Forecasting : Overhang of stock – capacity utilisation low at Fiat

Arthur Maher at forecasters JD Power-LMC Forecasting services says that his analysis “suggests that we finished 2003 with too many cars.  We estimate that stocks rose by 106,000.”

That overhang has not gone away during 2004, says Maher. Total European car build was up to 340,000 units (+4%) in the first half of 2004, Maher estimates.
Most of the growth took place in Eastern Europe up 200,000 units (+30%), with volumes up 100,000 units in Western Europe.

Maher says that there was a relatively modest level of de-stocking in the first half, and estimates the third quarter of 2004 saw no de-stocking.  Maher expects this stock overhang will persist “we envisage stocks moving up a shade in Q4, despite Jaguar and Fiat cutting back on build”, says Maher.

That leads JD Power-LMC Forecasting to expect that a reduction in stock will depress production in 2005. However, because of important new models coming through, such as the Citroen C4, GM Astra, Renault Modus, Volkswagen Golf Plus and the new-segment model for PSA and Toyota, progress on de-stocking may be slow, says Maher.

Maher estimates that European capacity utilisation is currently 78%, two percentage points higher than 2003. But the contrast between the best performers and worse performers in capacity utilisation is wide.

“BMW and PSA are currently operating at 90%+”, says Maher, “while Fiat remains an outlier at 65%.”

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