Europe Is a Ditch for Automakers

by Jim Woods | September 28, 2012 9:37 am

Auto shows have always been big events brimming with optimism for carmakers. The glitzy release of new models, the promise of recruiting new customers and retaining loyal ones, and a big stage to show off new technologies has always been an exciting part of the industry.

Unfortunately, this year’s Paris Auto Show — which officially opens on Sept. 29 — seems to have a pernicious cloud hanging over it.

And that cloud is a very difficult European auto market.

Over the past year, the world has become all too familiar with the region’s fiscal troubles. Riots in Greece over austerity measures, spiking Spanish and Italian bond yields, and moves by the European Central Bank to step in with a bailout program[1] to keep sovereign yields under control all have highlighted Europe’s economic struggles, and now the pain of a recession in the region has enveloped the auto industry.

According to a recent report from the Associated Press[2], “the future of labor strife, lower sales and more financial uncertainty” are the major undercurrents running through the showroom at the Paris Auto Show.

The growing concern over the fate of Europe’s auto industry should come as no surprise, especially considering that new passenger car registrations in the European Union fell 8.9% in August. That’s the 11th straight month of falling registrations in the region, and a clear sign that the market for new cars is contracting in the Old World.

Unfortunately for automakers that want to sell cars for a profit in Europe, the slowing in the region has forced some car companies to offer deep discounts that could really ramp up losses. For example, Fiat SpA (PINK:FIATY[3]) owners of iconic American brand Chrysler, and French carmaker PSA Peugeot Citroen (PINK:PEUGY[4]) are offering discount pricing of as much as 30% to juice sales.

In an interview with reporters[5] at the Paris Auto Show, Susan Docherty — head of General Motor’s (NYSE:GM[6]) Chevrolet unit in Europe — said, “Nobody can make money in Europe when you’ve got incentives at that level.”

According to European auto industry watcher Autohaus PulsSchlag, car sales in Europe are approaching a 17-year low. That’s a disaster for GM, which lost more than $600 million in Europe during the first half of 2012. Rival Ford (NYSE:F[7]) isn’t faring much better. The company is expected to lose about $1 billion in 2012 from European operations.

Europe’s biggest automaker, German auto giant Volkswagen AG (PINK:VLKAY[8]), also is feeling the pinch in terms of European sales. Although the company, which recently acquired full control of iconic sports car maker Porsche AG[9], did extremely well in the first half of the year in terms of U.S. and China sales, Europe admittedly remains a struggle.

“It’s a development that we all have to live with,” VW sales and marketing chief Christian Klinger said[10] at the Paris Auto Show.

For carmakers, the downturn in Europe is something that will have to be adjusted to. That could mean plant closures in the region, and an additional focus on growing areas such as China and other emerging markets.

It also could mean profits could be stuck in a European ditch for some time to come.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2012/09/europe-is-a-ditch-for-automakers/

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