EU carmakers rev up for harsher times

European car manufacturers face tougher times both at home and in emerging markets, writes Jennifer Rankin.

These are tough times for the European car industry. Saturated markets in western Europe, cut-throat competition in emerging markets and over-capacity have all been familiar stories in recent years. This year the industry must also contend with shaky economies, faltering consumer demand and the weak dollar.

Demand for new cars in core western European markets looks likely to be stagnant in 2008. According to Moody’s, a credit rating agency, passenger car registrations in western Europe are expected to remain flat for 2008, as demand from consumers in Spain and the UK is hit by the fallout from the credit crunch. Meanwhile competition from Asian competitors remains fierce and EU regulators are becoming more demanding.

Many manufacturers are eyeing emerging markets in central and eastern Europe, as well as the vast markets in Brazil, Russia, India and China - the so-called BRIC countries. But new markets do not provide all the answers. The BRIC countries are more vulnerable to peaks and troughs in the business cycle. "These regions will have a good prospect for further growth over the next six months, but they are expected to have more volatile patterns of demand, they are vulnerable to high inflation and external shocks," says Falk Frey, a senior vice-president at Moody’s.

European car manufacturers are also moving their production out of western Europe, whether to central and eastern Europe to serve the European market, or further afield to Asia to meet rising demand in Asian countries. But some firms find it difficult to close existing plants because of political pressure, so instead may choose to develop new lines and models in central and eastern Europe while not replacing old capacity in western Europe. Over-capacity in western Europe currently stands at around 20-25%. Last month, BMW announced its first ever large-scale job cuts, with around 8,000 jobs to go in Germany. In contrast, car companies have been moving into new member states, especially the Czech Republic and Slovakia. Slovakia, which produced 295,000 cars in 2006, could become the country with the largest carmaking capacity measured in output per person.

But even if European carmakers increase overall sales, they may struggle to hang on to their share of world markets. In 2007, the EU27 made one-third (33%) of world passenger cars. But this share looks likely to fall. Lars Holmqvist, chief executive of the European Association of Automotive Suppliers (CLEPA), predicts that Europe’s share of world markets could drop to 20% in 20 years’ time.

Holmqvist thinks that small- and medium-sized producers will face the biggest challenges in the face of booming car industries in India and China. He thinks that larger carmakers, such as BMW, are in a comfortable position because of their premium brand and extras. "In the top end of the market you have new technical features. With medium and smaller cars you have to compete on styling," he says, citing the popular Fiat 500 as evidence of how "style icons" attract customers in the face of tough competition on price. Earlier this month, Tata Motors, an Indian company, unveiled its one-lakh (100,000 rupees/€1,730) ‘people’s car’, underlining how intense competition for new drivers will be in emerging markets.

It is a tough road ahead. But carmakers at this week’s European Motor Show in Brussels can console themselves that things could be worse as most analysts think that American carmakers face an even more difficult task.

European carmakers

BMW sales are expected to grow this year, helped by expected recovery in the German market and strong brand. But their heavier, more polluting vehicles will struggle to meet European standards on carbon emissions. With a fleet average in 2006 of 184g CO2/km*, they are one of the most polluting carmakers and the risk of penalties is substantial.

Fiat has seen an upturn in its fortunes in recent years, but could be hit by weakening demand in Italy. It has big plans for expansion in India and China and last year announced a joint venture to make 175,000 cars with Chery Automobile, a Chinese company. At 144g CO2/km it has one of the lightest carbon footprints among European carmakers.

Renault saw a small growth in sales in 2007, helped by models such as the Twingo and Laguna, an improvement on its 2006 performance. Renault has benefited from an alliance with Nissan, but Nissan’s slip in performance could pull Renault down in analysts’ rankings. It comes in at 147g CO2/km.

PSA Peugeot Citröen

Demand for hatchbacks saw PSA Peugeot Citröen win back sales in 2007 and increase sales outside western Europe by 11%. Nevertheless, the French company faces "significant challenges" according to Moody’s, which argues that it must regain European market share and make better use of capacity at European plants. It has the lightest carbon footprint of all manufacturers at 140g CO2/km.

*Source for CO2 emissions figures - Transport and Environment. All figures refer to fleet average for 2006.

European car manufacturers face tougher times both at home and in emerging markets, writes Jennifer Rankin.