European autos: ramping up
The high end is still the place to be
The self-driving F015 Mercedes-Benz is exciting, sexy and mostly irrelevant. The automobile business is not about whizz-bang; it is about basics — update the capital consuming monster that is the production line to make cars more cheaply and more cleanly, and sell more of the highest-margin models.
In recent years, the US market generated cash for the auto industry, emerging markets generated growth, and Europe generated overcapacity. That is all starting to change. The US is still doing its bit — record US sales in 2014, with growth in high margin pick-up trucks and sport utility vehicles — so the industry is producing cash. But emerging markets are not delivering the growth expected. Brazil and Russia are suffering and even Chinese growth is slowing.
Instead, it is Europe that is growing. European sales between January and November last year grew 6 per cent over the same period in 2013. In the UK, 2.5m new cars were registered in 2014, a 10-year high and 9 per cent increase over 2013. But Europe will not keep growing like this much longer. The improvement is coming from a low base, and sales have been boosted by financial incentives — such as Spain’s scrap incentives and a UK contract purchase scheme — that may not last.
So with sales growth uncertain, manufacturers need to do all they can to keep costs down. That is tough. Rising emission standards push up manufacturing costs and customers are expecting more for their money (sat nav as standard, please.) So carmakers are trying to cut costs by making as many models as possible from a common platform. Component makers such as Valeo and Continental — whose products allow manufacturers to improve emissions fairly cheaply and quickly — should find plenty of business.
In this environment, premium carmakers such as BMW and Daimler look well placed. The luxury market is doing well and they have scope to introduce smaller models (which will help them to meet CO2 targets). If novelties such as the F015 can help them a little way down that road, so much the better.