LONDON — Europe’s enduring economic slump has left its auto industry hurting with sagging sales forcing prices down and inventory up, even after thousands of factory jobs have been cut.
Mid-level manufacturers such as Renault and Fiat are struggling, with PSA Peugeot Citroën in February reporting a record 2012 loss of $6.5 billion. Higher-end companies are, however, faring somewhat better.
BMW recently announced record annual earnings in 2012 with 1.84 million vehicles sold during the year and net profits up 4.4 percent on 2011. Daimler AG’s Mercedes-Benz division sold 5 percent more cars in 2012, compared with 2011 and increased revenues by 7 percent to a record €61.7 billion ($79 billion), according to company figures. But the company said earnings before interest and taxes fell by 15 percent due to a poor mix of vehicle models in Europe’s declining market and increased spending on new models, technologies and expanding production capacity.
Credit Suisse analysts have said they agree with Daimler’s guidance that earnings will decline this year in the Mercedes division. BMW has said it expects earnings to be flat, with a squeeze on both prices and demand for cars. The analysts pointed out that “BMW’s outlook for 2013 might not represent great performance relative to BMW’s recent track record, but (it) represents great performance in our view, given the environment.”
Premium brands such as BMW and Mercedes-Benz have several advantages over those in the mass market, including less competition, said Nick Oliver, a professor of management at the University of Edinburgh Business School in Scotland.
“There’s a big difference between sharing out the margins between two or three car makers and sharing them between eight or nine,” he said. “That’s one of the reasons you can make more money in the premium segments. There are not so many companies fighting there.”
The higher-end manufacturers have also staked out strong claims in developing countries such as China, India and Brazil where demand is growing far more rapidly than in Europe, Oliver said. Few of the European mass-market companies are active in those markets, leaving them dependent on sales in their mature and, for the past five years, very weak, home territories.
Credit Suisse analysts said in a report entitled “European Automotive: Overhang to Hangover” that, with inventory at its highest level since 2008 and sales sliding, Europe’s mid-level car makers would have to cut production by about 7 percent year-on-year to reduce inventory to manageable levels. Renault, PSA Peugeot Citroën and Fiat are also consuming large amounts of cash with little sign that conditions could improve soon, the bank warned.
In some ways, the car companies are victims of their own success, said Pedro Nueno, a professor of entrepreneurship at IESE Business School in Spain. Thanks to improvements in manufacturing, vehicles last much longer than in the past, which means drivers upgrade their cars less frequently.
That’s bad news for car manufacturers in Europe, where most sales are to replace older models rather than being first-time purchases, according to Nueno. “If there is economic uncertainty, people say, ‘OK, let’s wait for another month,’” he explained.
In a recent report entitled “Geneva Motorshow Feedback: Fading Hope,” Credit Suisse analysts noted that, in 2012, the industry benefitted from fairly healthy sales in Germany and Britain. But both of those markets now appear saturated, with car registrations falling in Germany and British car dealers offering big discounts to move vehicles out of their showrooms, the analysts said.
“With the German market having turned and developments in the U.K. seemingly unsustainable, we ask whether the European market can take another leg down,” the report said. It also noted “the absence of any tangible evidence that demand is improving or that company actions can offset the deterioration in the European market even beyond 2013.”
Credit Suisse cited BMW as having one of the region’s healthiest business models, thanks largely to its strong exports. It also warned that things are bound to get tougher for Europe’s legacy car makers with foreign manufacturers, such as the Chinese-Israeli car company Qoros Auto Co., poised to enter the European market with competitively priced models.
In most industries, weak market conditions and poor performance would lead to a shakeout, with struggling companies closing down or being acquired by competitors. But that often fails to happen in the auto industry, sometimes because national pride and the desire to hold on to manufacturing jobs prompt governments to lend support to ailing car makers, said Oliver.
Even the U.S. – a strong advocate for free markets – has bailed out two of its big three carmakers, he noted.
“In countries like France and Italy, for example, it’s going to be a very, very brave government that says ‘If it’s not making money, it’s got to close,’” Oliver said. “It’s a little bit like a game of chicken, really. The first one to fold and leave the table …will make life a lot easier for everyone else, but no one wants to do that.”
More likely, a big multinational company like GM or Ford may decide to scale back or offload its European operations, providing some breathing room for the likes of Renault or Fiat.
IESE’s Nueno was more optimistic, contending that the sector did not have fundamental problems and would likely recover when the European economy does. Because shipping autos from thousands of miles away is impractical, manufacturers are likely to keep building cars on the continent even if new foreign entrants take a chunk of the European market, he said.
“It might be that 10 years from now we see that the names and the numbers of the players have changed,” he said. “But we will still have an industry.”
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