European Car Recovery Could Still Sputter Auto Registrations Are Rising, But Profitability Is Still Pressured
Europe’s auto industry is wheeling toward its first year of growth since the financial crisis. That doesn’t mean it has decisively turned a corner.
New car registrations in the European Union jumped 6.1% in the first 10 months of 2014, surpassing annual consensus growth forecasts ahead of the usually strong final two months of the year. All of the top 10 car makers reported growth except General Motors , largely because it will stop selling the Chevrolet brand in Europe. Of the top five markets, only France has gone into reverse, with a 3.8% drop in car sales.
But this recovery follows the worst year in two decades, and six consecutive years of decline. And the boost in sales is at least partly artificially supported by measures such as government-backed cheap credit and subsidies. Also, auto makers stuck with too much inventory are cutting prices, eating into margins. In Germany, where overall registrations rose 3%, the share of sales to private car owners actually fell 2% in the first 10 months, according to information firm IHS. This is offset by higher sales to companies or rental businesses, but those likely involve more discounting. Margins in Europe have remained flat or fallen slightly for most car makers, credit insurance provider Euler Hermes says.
One reason: Overcapacity hasn’t been addressed, and more-optimistic sales forecasts could further hamper progress. Europe’s factories aren’t running close to flat out but are still making at least 20% more cars than natural demand can sustain, IHS estimates. Since 2009, at least 17 U.S. factories closed, versus just four in the EU, Euler Hermes says.
Rather than implement overhauls at home, European car makers have looked overseas, especially to the U.S. and China. Those with greater exposure to these markets tend to trade at a premium. Volkswagen trades at 7.2 times 2015 earnings versus Renault , which relies on Europe for about half of its brand sales, at 6.5 times.
But growth in China is now showing signs of slowing. By ignoring problems at home, Europe’s car makers risk stalling on the road to recovery.