Europe’s carmakers put the champagne on ice as sales inch forward
An employee inspects the engine of a Dacia Duster automobile, manufactured by Renault SA, at the company's factory in Pitesti, Romania, on Thursday, July 3, 2014. European car sales rose 4.3 percent in May, the ninth consecutive monthly gain, as growing consumer confidence encouraged purchases of new models from Renault SA, Volkswagen AG and General Motors Co. Photographer: Chris Ratcliffe/Bloomberg©Bloomberg
Car sales rose 6.5% in Europe in the first half of 2014, but demand in Brazil and Russia has 'fallen off a cliff'
The financial charts on Jérôme Stoll’s desk painted a perplexing picture.
The green numbers all over Europe’s battered, sagging car market, and the red ink across his treasured emerging-market charts, were not what the chief performance officer at Renault was expecting to see at this month’s midyear review.
For so many years, it had been the reverse, as the rest of the world subsidised the industry’s travails in Europe.
“Last year . . . we announced a decrease of our volumes in Europe by 7.3 per cent,” explains Mr Stoll. “Back then, we could show that our international development strategy enabled us to compensate for the hazards related to the European market. This year it’s the opposite.”
The French carmaker is not alone in taking the counter-intuitive news with a pinch of salt.
Europe’s car market, which has dragged half of the world’s biggest carmakers into billions of dollars’ worth of losses over the past few years, is now stumbling into patchy, stuttering, but undeniable growth.
But in the boardrooms of carmakers across the continent, the champagne is still firmly on ice.
The overall growth of 6.5 per cent in European car sales over the first six months of the year masks large peaks and troughs in major markets. Carmakers are still spending vast amounts on discounts to tempt wavering buyers. And most importantly, the rise in demand is nowhere near enough to fill idle, inefficient, factories that are bleeding cash.
“The market in Europe is not really growing,” says Karl-Thomas Neumann, chief executive of Opel, Europe’s third-largest car brand by sales. “The year started off pretty bullish. We are all a bit more cautious now.”
“There are areas with growth,” says Mr Neumann, “[but] it is certainly worse than we thought at the start of the year.”
Adding to the gloom is the state of car demand in emerging markets: countries that European carmakers were banking on for revenue growth.
While sales in China, the world’s largest car market, continue to motor on, countries such as India, Brazil and Russia have swung from being industry darlings to devils in just a couple of years.
Demand in Brazil and Russia has “fallen off a cliff and should continue to disappoint,” according to Exane BNP Paribas, which expects sales in the countries to fall 6 per cent and 12 per cent respectively this year.
This month, for the first time in years, PSA Peugeot Citroën was able to cheer European growth at the top of its half-year performance press release. News of a 22 per cent fall in Brazilian sales and a 26 per cent fall in Russian sales was buried lower down in the statement.
The year started off pretty bullish. We are all a bit more cautious now. There are areas with growth, [but] it is certainly worse than we thought at the start of the year.
- Karl-Thomas Neumann, chief executive of Opel
There is certainly something to celebrate in the momentum in Europe. Having hit a historical annual low last year, European car sales rose for a 10th consecutive month in June. Over the same period, the Stoxx 600 index of European automotive shares went up 14 per cent.
But the recovery in demand is as unevenly spread as it is minuscule.
Of Europe’s five largest markets, which together account for three-quarters of the continent’s sales, only the UK and Germany buy as many cars as they did in 2007, up a measly 0.7 per cent and 0.4 per cent respectively.
In France, sales are 11 per cent lower than they were in 2007, while in Spain and Italy, sales are down a staggering 47 per cent.
Over the past six years, global light vehicle sales have risen 20 per cent. In the same period, Europe’s car sales have fallen by the same margin, according to research by AlixPartners, a consultancy, as austerity-hit consumers struggling with high unemployment and meagre economic growth eschew new vehicles.
That equates to 5m fewer vehicles being sold each year across the continent, and has left factory foremen with a shortage of orders.
“The European car market is not likely to recover soon; thus near-term growth is unlikely to cure the underutilisation issue in Europe,” says Stefano Aversa, European president at AlixPartners. “Those waiting for the tide to rise enough to lift their boat may be waiting forever.”
Despite a handful of factory closures by a few carmakers, 30 per cent of Europe’s car production capacity is sitting idle, according to Mr Aversa. That not only increases production costs per vehicle, but has also forced desperate manufacturers into a margin-savaging discount war.
“Overcapacity is a problem for us, and that is why we are trying to fix it . . . My job is to fill all my factories,” says Mr Neumann. Opel’s factory in Bochum, Germany, will fall silent at the end of this year, and the company, owned by General Motors, is exploring possible export opportunities.
“In the market, the capacity has to come down. We at least did something. Some others have also. Most others do not,” he adds.
The average discount offered by car manufacturers is more than €2,700 per vehicle, eroding or inverting profit margins, especially for mass-market players.
Opel, which has racked up losses of $2.75bn over the past two years, has pledged to break even by “the middle of the decade”, but has refused to give an exact date.
Ford, the continent’s second-biggest car brand, lost $1.6bn in 2013 but has promised to turn a profit at the end of next year. Peugeot, the carmaker most reliant on the European market, has lost €7.3bn since 2012 but targets 2 per cent operating margins by 2018.