European Automakers on Bumpy Trail to Slow Comeback

PARIS – The long decline of the European car market apparently hit bottom sometime last summer, five years after the 2008 financial crisis set it off.

The recovery will take about the same amount of time, say most analysts, and Europe may never reach the same sales-per-person ratio it had in 2007, when registrations totaled 15.96 million, or one new car for every 31 residents.

The good news is that there is universal agreement the market will grow in 2014.

UBS Securities in London sees improvement “of something like 2% to 3%, with the volume coming from the South of Europe,” says chief automotive analyst Philippe Houchois.

Inovev in France forecasts growth of 3% to 3.5%. However, notes Inovev’s Jean-Michel Prillieux, some 4 million units have disappeared since 2007 and the growth forecast for next year “is a long way from catching up. Normally, market growth will continue through 2018, but it will remain less than 2007.”

Last year, 12.05 million cars were registered in the European Union, and this year registrations likely will be down 2% to 3% again, to about 11.75 million units, or about one car for every 43 of the 506 million residents of the 27 countries.

The outlook will differ for every automaker, of course, because they all are different, as are the 27 countries. However, the economy overall in Europe is stagnant.

The European Commission forecasts growth of 1.4% next year in the EU, and only 1.1% in the countries with the euro currency. Germany, France, Italy and Spain are in the eurozone, and they accounted for 62.9% of all car sales in the first nine months, according to the ACEA automotive industry association.

In terms of business, the premium makes are in relatively good shape as their customers have suffered less than middle class during the downturn. The volume makers have additional economic problems related to their capacity to build more cars than the market demands, and they remain cautious.

At Ford, whose market share has fallen 29.9% in Europe since 2007, spokesman Adrien Schmitz says “incoming data suggest euro-area economic and industry conditions have begun to stabilize and are consistent with a modest recovery that could occur in the near term.

By mid-decade, we expect the industry to grow only modestly.”

However, he says, Ford believes “the wider European region (51 markets) presents a significant opportunity for profitable growth and expects vehicle sales to grow 20% in the next five years to 23 million vehicles.”

At Renault, which has regained 0.3 share points this year after several years of loss, spokeswoman Rie Yamane says, “At this stage, we can’t say more than the fact that we think that the evolution of the market in Europe will be moderate growth for 2014.”

Earnings in Europe are lower than those in the U.S. because, unlike their Detroit counterparts, European automakers didn’t reduce capacity during the crisis, says Philippe Houchois, managing director-UBS Securities in London.

“The only OEM that attacked capacity aggressively in Europe is Ford,” he says. “Others have done some but not enough.”

Where European capacity has dropped from about 25 million units to 23 million, he says, U.S. capacity was cut from 18 million or 19 million to 14 million.

Pent-Up Demand a Structural Plus for Automakers

Overcapacity is not a problem for everyone. Hyundai-Kia, whose market share has grown 12.3% since 2007, added capacity in Turkey in July. Daimler opened a factory in Hungary last year and Audi opened a new line there this year. BMW will start making Minis next year at the Nedcar plant in the Netherlands, where WardsAuto/AutomotiveCompass forecasts production of 17,000 units in 2014.

If the additional volume comes from Southern Europe as UBS forecasts, that should help Fiat, PSA Peugeot Citroen and Renault, which are relatively strong in those countries.

Although the market seemingly has bottomed out, structural problems will confound European automakers’ efforts to sell cars as they did before 2008.

“It’s not only a lack of money,” says Prillieux. “There have been changes in how we use cars. We keep them longer, we drive less, people turn to car-sharing services and car pooling, and more cities are making rules about what can drive there.

“People are hesitating to buy. There has been a change in mentality.”

Pent-up demand after six years of declining sales is a structural plus for the industry, but it is up against a population that not only is aging but also is growing slowly. People of working age buy more vehicles and do more driving than retirees.

In a paper he delivered in 2007, Rainer Muenz, seniorfellow at the HamburgInstitute of International Economics, reported that for Europe, “forecasts until the year 2050 project both substantial aging as well as a declining population at working age and a substantial increase in the number of retired people.”

Car-sharing and car-pooling reduce the number of vehicles required to provide individual transportation, and both are growing fast in Europe.

Blablacar, which started in France in 2004, now matches drivers and passengers for shared trips in eight countries. Chief Operating Officer Nicolas Brusson says 2 million miles (3.2 million km) on the road “have been shared by members of the community.”

Bundesverband CarSharing, an industry association for 140 car-sharing systems in Germany, says 453,000 people there were registered members at the beginning of the year.

The economic argument to potential users on its website is clear: You need to work more than two months a year to possess your car. More than 50% of the monthly costs are fixed costs – depreciation, repairs, taxes, insurance… A small car like the Opel Corsa will cost you, at mileage of 15,000 km (9,000 miles) per year, a whopping €335 ($447) month after month.”

Individuals rent their personal cars to neighbors in one version of car- sharing. In 2009, the French research group ADEME said 35,000 to 70,000 people rented cars privately from other individuals in France, four to eight times more than subscribers to car-sharing services.

“The potential for car sharing in the private sector is high,” concludes the report, “because of the great number of cars that are used little, even very little, and the high cost of ownership.”