European Auto Market Weighted by International Tensions

European automakers already were treading water as Germany, Italy and Spain spent much of 2001 trying to avoid a recession. France's economy was vacillating, while the U.K. optimistically was holding its own. Then, the Sept. 11 terrorist attacks took place in the U.S., sending everything off track and causing most analysts to toss out their economic models.

Now all of Western Europe is bracing for the coming year's economic roller coaster. Many analysts claim the climb into positive territory will be an insurmountable task for 2002, but that 2003 still holds promise. The dreary forecasts are placing added pressure on automakers to streamline operations and bring capacity in line with overall demand.

Auto sales in the region had been expected to decline 1.5% overall this year, possibly falling to 2% in 2002. But a recent study by Autopolis, an auto industry-consulting group, now suggests they may slip by as much as 2.8% this year and another 6.13% in 2002. DRI-WEFA revised its forecast, as well, predicting a decline in next year's new car registrations to 14.1 million units from an earlier forecast of 14.3 million, with a 1.5% drop in 2001 sales to 14.5 million.

In Italy, Fiat Auto SpA's Chief Executive Roberto Testore moved fast to respond to the impending economic jitters. Fiat cut output by 30,000 units in October, idling nearly 35,000 workers during the period, saying it will cut another 70,000 units by year-end. In Germany, Volkswagen AG announced it was closing plants in Emden and Wolfsburg for a week, eliminating 13,000 cars from the build. Ford Motor Co. is reducing production of its Mondeo by 600 per day, reducing output by 30,000 units for the year.

Reacting to the uncertain period, Renault SA of France announced it, too, planned to idle plants — for four days, resulting in 10,000 fewer cars. But a report in the French newspaper Le Monde said the automaker might shut plants in France and Spain for as many as three weeks before the end of the year. “We have no clear indication of the current evolution of the market,” Renault Chairman Louis Schweitzer reportedly said in a statement to union leaders. “Building up excessive stocks, which would penalize us if there is a sudden change, is out of the question.”

As of October, 100,000 total units had been removed from production plans by major automakers. “Sales in the summer were stronger than expected, so the companies with a slight inventory surplus might have thought it would take care of itself naturally,” says Nigel Griffiths, an analyst with DRI-WEFA in London. “That expectation no longer exists, and it has become prudent to take measures that will bring inventory down to desired levels.”

A recent update on the world economic outlook completed by the International Monetary Fund suggests the overall Western European economy could deteriorate 0.6% more than predictions made before the U.S. terrorist attacks. The IMF forecast now calls for the region to see fiscal growth of just 1.8% in 2001 and 2.2% in 2002 — a dire outlook for automakers counting on increased market penetration.

Adding to the region's headaches, the 12 nations that make up the euro zone economy officially will switch their individual currencies to the euro on Jan. 1, 2002. The euro holds its own set of complex issues with which countries will have to grapple; calling for a set of rules on finance, taxes and labor that will satisfy all 12 member nations. Additionally, the euro zone countries will have to learn to deal with one central bank rate rather than the myriad of interest rates that had been commonplace in the region — a factor that could spell boom or bust for some economies.

Western Europe's auto industry, which has been doing business based on the euro for some time, has other issues. The German market, in particular, has been a noose around its neck. The IMF expects Germany's unemployment rate to climb to 7.9% in 2002 as a result of increasing labor costs. Germany's real gross domestic product growth is expected to slow from 3.0% in 2000 to 0.8% in 2001 and 1.8% in 2002, while consumer prices are forecast to climb by 2.5% in 2001 and 1.3% in 2002.

The turmoil in Germany — which is Western Europe's largest auto market — has hit auto sales hard. New car registrations in Germany declined nearly 2% during the first seven months of 2001 compared with the year-ago period, ending at 3.33 million units versus 3.38 million. The big worry is that if Germany continues to tumble, it could cause a domino effect, impacting the economies of Italy and France even further, with the distinct possibility of inciting a slowdown in Britain.

Italy now expects overall growth in its economy to slow to 2.4% in 2002, significantly lower than the 3.1% growth projections forecast earlier in the year. While the unemployment rate has dropped to its lowest level in eight years, recent announcements of layoffs at Italy's largest airline, as well as temporary layoffs at several Fiat plants, could negatively impact Italian consumer confidence. A report by Italy's Centro Studi Promotor institute — an auto market think-tank group — says orders for cars in Italy plunged 35% in the initial weeks after the terrorist attacks in the U.S.

The IMF's outlook suggests that Italy's unemployment rate should bottom out at between 9.5% and 9.1% in 2002, while the country's real GDP growth should slow from 2.9% in 2000 to 1.8% in 2001, ratcheting up a bit to 2.0% in 2002. Overall, the strength of the Italian economy seems pretty solid, but any ripple effect could shift the foundation and destabilize future prospects.

Spain, meanwhile, has been under intense negative pressure that includes significant declines in growth, consumer spending and a relatively high level of unemployment. Economic growth is expected to slow to nearly 2.7% in 2001 and 2002, sharply lower than the 4.1% reported in 2000. Unemployment is expected to remain firmly above 12.5% in 2001 and 2002. Spanish auto sales, however, posted a 1.5% gain through the first seven months of the year, coming in at 983,907 units.

France's fiscal health is tenuous. Up to now, the euro zone's second-largest economy has managed to keep its economic engine humming thanks to continued low unemployment and relative stabilization in consumer prices. IMF projections suggest real GDP growth should level off at around 2% for both 2001 and 2002, while unemployment should drop from 9.5% in 2000 to 8.7% in 2001 and 8.5% in 2002. French consumer prices should also stabilize, with growth less than 2% in 2001 and 2002.

But while France has benefited from strong investment growth and tax relief packages, consumer confidence fell to its lowest level in September following the suicide attacks in the U.S. Analysts say the question now is whether consumer demand will continue to show resilience. French auto sales had been expected to remain relatively steady in 2001 and 2002, but the worsening job climate could change that. This despite a 2% sales gain in September that saw new car registrations rise to 153,151 from 150,191 in the same prior-year period.

Renault announced in early October that it was temporarily shutting down its largest French factories from Oct. 29 to Nov. 2, saying the outlook for Europe's car market was becoming increasingly murky. The cutbacks were aimed at operations at the Douai and Flins facilities, which build the Megane Scenic minivan and Clio and Twingo small cars. Sandouville, which produces the larger Laguna, and the light commercial plants of Maubeuge and Batilly were to halt work for one day.

The U.K., which had been riding high on continued strong consumer confidence, rising real estate prices and strong consumer spending, managed to grow at a relatively robust rate during the first six months of the year. The British government, in a recent report, says it expects to post an annual growth rate of 2.3% during 2001, with the IMF suggesting the economy could stay on that growth pace through 2002.

Unemployment is expected to remain relatively stable through 2002 at near 5%, while real consumer prices are expected to grow at between only 2.2% and 2.4% through 2002. That spells good news for automakers searching for any ray of light.

Nevertheless, Jaguar Cars said it planned to extend shutdowns at its facilities due to market volatility in the U.S. Ford's luxury maker reportedly planned to transfer up to 3,500 assembly workers to other duties at its Browns Lane and Castle Bromwich plants, where it assembles the XJ, S-Type and XK models, for two weeks in October.

British carmaker MG Rover said it planned to go ahead with a new luxury sports car, the MGX80, to be built at the company's Longbridge, Birmingham, plant. Additionally, the first shipment of British-built Honda Motor Co. Ltd. Civic Type-Rs set sail for Japan in early October, the first of 5,000 destined for Honda's home market in the next 12 months. The second phase of U.K. exports from the Swindon plant is to begin in December with the first Civic 3-door to the U.S. and Canada, followed by shipments of Honda's new CR-V sport/utility vehicle in spring 2002. In all, Honda plans to export 200,000 units from the U.K. annually to destinations throughout the world.

In addition to Honda, DaimlerChrysler AG, Volkswagen and Fiat are particularly vulnerable to a global downturn because they rely so heavily on global market activity. Mercedes-Benz, for example, depends on the North American market for substantial profits and is looking to grow its share in the region.

Mercedes reportedly expects worldwide sales this year to exceed the 2000 record of 1.05 million. But a further slowing in Germany could beset its domestic sales gains. While the automaker has yet to make production cuts at any of its facilities in Western Europe, the likelihood of slowdowns could build. DaimlerChrysler said last month that its 2001 profit targets were at risk after the Sept. 11 attacks and would remain so to the end of the year.

Volkswagen already has taken some drastic steps to keep its volumes in line with demand, especially in light of the slowdown already in place in the German market. The company closed its Wolfsburg plant for three weeks in August, the first time the plant had been shut down since its launch in 1937. The German automaker has seen its share price drop significantly since the terrorist attacks in the U.S., similar to many other automakers. In a published report in September, VW Chairman Ferdinand Piech warned investors the company might miss its 6.5% margin targets for the year.

A slowdown couldn't come at a worse time for Volkswagen, which has been riding high on the success of several new models and is in the process of launching some key products for global markets, most notably the new Passat W-8, Polo and '03-model sport/utility vehicle. Additionally, Mr. Piech recently announced he would step down from his post in April 2002, with former BMW AG Chief Bernd Pischetsrieder taking the helm.

At Fiat, meanwhile, a drop in market demand has impacted production of the highly anticipated new Stilo and Alfa Romeo 147. Additionally, Fiat's plans to return to North America reportedly are being delayed as alliance partner General Motors Corp. deals with its own restructuring of European operations.

A crucial component of GM's strategic “Project Olympia,” calls for GM to bring its Adam Opel AG and Vauxhall subsidiaries up to sustained profitability by 2003 (see story p.40). The automaker intends to cut production capacity in Europe by around 15% and reduce its cost structure by €2 billion ($1.82 billion) within that timeframe. Opel reported an operating loss of $453.4 million in 2000. GM also will cease passenger car production at its Luton, England, plant in 2002. Such moves may not be enough to keep GM's European operations on track in the new world order, however. Some industry analysts expect GM will have to take further steps in the near-term.

Ford of Europe also is in the midst of a transition, and further erosion in auto sales could prompt deeper streamlining of operations. Ford already has taken steps to realign production in Europe via an overall 20% capacity reduction, much of that by closing its Dagenham, England, plant and is in the process of revamping its product line to better meet the needs of European consumers. In addition to the recent reduction in Mondeo production, the company also is shutting its automatic transmission plant in France — which makes U.S.-bound components — for eight days.

“I think we can all agree that the world economy is in a state of indecisiveness on which way to go,” says Carl-Peter Forster, Opel management board chairman. “We should be perhaps more bullish. On the other hand, it is also good not to plan for a huge volume increase, certainly not in the European market for the next few years.”

Once Western Europe works out its hiccups, the market could be poised for a strong rebound in the later part of 2002, continuing on through 2003, predicts DRI-WEFA's Mr. Griffiths. “By the third quarter of next year, things could be set for quite a big rebound,” he says. “This low-inflation, low-interest rate environment could set the stage for a sharp rebound, but it probably will be too late to hit car sales until 2003.”