Euro Debt, Currency Woes Threaten Auto Industry Gains

Special Coverage

State of Industry: International

If “risk” was the theme of the international automotive industry last year as markets continued their climb out of the financial meltdown of 2009, then “caution” is the new mantra in light of Europe’s sovereign debt crisis that threatens world economies driving into 2012.

The eurozone contagion this year spread to nations such as Poland, Portugal, Italy, Ireland and Spain. But beleaguered Greece quickly became the biggest worry. Should the country ultimately be forced to abandon the European Union’s single currency, it would be a jarring setback for the 27-member bloc whose integration began following World War II, bringing economic stability.

For auto makers, the euro has allowed the EU to move away from nationalistic car buying, shifting the region’s product mix and expanding opportunities for new segments to emerge, while also eliminating currency exchanges and tax complications.

Signs of the Europe’s sluggish growth and high public debt have auto makers concerned. EU new-car registrations in September inched up just 0.7% to 1,232,707 units thanks to slight growth in the German market, but were down 1.1% to 10,122,983 year-to-date, according to the ACEA, the European auto makers’ group.

Several car companies reportedly are cutting back production or overtime at their plants because of the weakening market, including General Motors, Ford, Renault and PSA Peugeot Citroen. GM is planning about 60 non-working days at its Opel/Vauxhall plant in Zaragoza, Spain, through the end of 2012 and another 20 in Eisenach, Germany.

A GM spokesman tells WardsAuto vehicles built at the plants are seeing soft demand in the market right now, and the European market itself is expected to be softer in 2012.

Even emerging markets, on which so many hopes ride, are showing signs of fatigue from Brazil to South Africa to China.

Analysts particularly are watching to see whether China can rein in its fast-paced economy without seriously curtailing growth. Beijing has put increasing focus on fighting inflation, leading to concerns that the economy could cool significantly.

“Right now, there is a lot of potential for instability,” Tim Urquhart, an analysis at IHS Automotive, tells The Wall Street Journal. “All we need is a macro-economic shock in China, and the whole house of cards could come down.”

In a recent interview with the Financial Times, Tom Linebarger, who takes over in January as CEO of Cummins, one of the world’s biggest engine makers, says he expects the next six to nine months to be highly uncertain for the global economy.

Auto makers are showing a brave face to industry headwinds, calling for a cautious but calm rebalancing act, as world markets react to such volatile times.

The U.S. auto industry, in particular, sees itself as better-positioned, having already undergone the pain of reorganization: slashing jobs, shutting plants and dropping or changing brands. But Detroit car makers still are vulnerable to the vagaries of overseas markets, where they make a large share of their profits.

While executives at September’s Frankfurt auto show said they did not expect an economic crash of the same magnitude as 2009, they urged Europe’s politicians to take bold moves, warning the euro could be derailed without decisive action.

Ford of Europe CEO Stephen Odell spoke for many when he said he was keeping a watchful eye on market conditions and the resulting impact on consumer confidence. “The key is to stick with your plan and keep investing in products, because we know we’ll need them in the future,” he said on the sidelines of Europe’s most important auto show.

Fitch Ratings says it does not expect a recession-like scenario in 2012. "Unlike the second half of 2008, early warning signs are clearly visible for manufacturers and they can prepare – and have prepared – for a potential slowdown in sales,” Emmanuel Bulle, senior director-Fitch’s European corporate team, says in a statement.

GM among EU auto makers cutting back production due to weakening market.

Didier LeRoy, head of Toyota Europe, tells Reuters the auto maker is sticking to its target of profitability for 2012, while also admitting it will be a challenge. Toyota is not taking a firmly optimistic or pessimistic view, he says. “We are very cautious, and we carefully monitor every day what is happening.”

Japanese auto makers have other problems with which to contend as they strain under the weight of the soaring yen, which makes their vehicles more expensive to sell in foreign markets. The dollar hit a record low in August to $1:¥75.94 and the euro slid to its lowest in a decade at E1:¥103.90. The Japanese industry prefers the yen to trade at ¥120 against the dollar.

Nissan CEO Carlos Ghosn warns the auto maker may have to rethink its production strategy if the yen is trading at current levels next spring, although he does not expect that will be the case. Auto makers and suppliers have been urging the government to take action, but so far there has been no decisive plan from the new prime minister.

Ghosn already has said the next generation of Infiniti luxury cars, which are not sold in Japan, will be built outside the country and there are plans to produce an Infiniti model in the U.S. starting in 2012. Nissan earlier shifted production of its Micra/March small car to Thailand and India for domestic sales and export in Asia.

Nissan, along with Honda and some others, reportedly is scaling back production in Japan to 1 million units annually and will source more parts from overseas, because the strong yen gives Japanese companies stronger purchasing power.

Domestic auto makers say they want to maintain a certain level of production in their home market to maintain the industry’s manufacturing craftsmanship and protect jobs; 5.2 million people hold auto-related employment.

In an unusual joint commentary in June, the chairman of the Japanese Auto Makers Assn. and the president of the Confederation of Japan Automotive Workers Union warned the yen’s high exchange range was exceeding the limits of efforts made in past decades by the industry to cut costs and maintain international competitiveness.

Add to that Japan’s three consecutive quarters of economic contraction, an aging population and disinterest by younger consumers in buying new cars, all of which point to a continued lackluster growth in 2012.

China’s renminbi has been appreciating as well. Since the end of its dollar peg in June 2010, the currency has continued to climb. The result is growth in the domestic economy is slowing, inflation is rising and the price of export goods is increasing, bringing little relief to a possible global slowdown.

The undervalued currency helps Chinese firms gain market share at the expense of foreign rivals and that, some analysts say, might be part of the reason for Europe’s malaise, according to The Wall Street Journal.

The International Monetary Fund in late September sliced a mere tenth of a percentage point off its estimate for China’s economic growth this year, leaving it a still-enviable 9.5% forecast. That’s enough for General Motors to stay the course with its plan to double the number of cars it sells in China to 5 million by 2015, more than twice the 2.35 million the company sold in 2010.

The U.S. auto maker, which has 11 joint ventures in the country, particularly has its eye on the rise of luxury-car sales in Asia and says Cadillac will play a bigger role. Ford is bullish as well, with September sales surging 40% ahead of year-ago. The auto maker is planning two new assembly plants in China and will expand its vehicle lineup from five to 15 by 2015.

But Chrysler and Fiat CEO Sergio Marchionne is not so generous toward the world’s biggest car market, warning attendees at the annual Traverse City, MI, Management Briefing Seminars in August that plans by Chinese OEMs to export vehicles pose an “enormous risk” to established auto makers.

“Even assuming China were to export only 10% of what it produces, the risk we face in our home markets is enormous,” he said at the time.

Few doubt Chinese vehicles eventually will make their way to major Western markets, but most signs point to a continued inward focus in 2012, as domestic auto makers and their foreign partners concentrate on developing indigenous brands of affordable family cars, with a focus on the interior cities.

But the central government’s push for a world-class electric-vehicle market arguably is occupying the lion’s share of effort for most auto makers in China, especially with Beijing’s insistence that foreign OEMs share their EV technology with their joint-venture counterparts.

Nissan-Dongfeng and GM-SAIC are among the longtime partners in China deepening their technical cooperation, including co-development of key components. However, GM says the move will not give SAIC unfettered access to the auto maker’s intellectual property, drawing the line – at least for now – at the Chevy Volt’s extended-range technology.

But even with generous government incentives for the purchase of EVs, Chinese consumers are showing little interest, in part because there is no real infrastructure in place. At the same time, auto makers are calling for an end to the Beijing municipal government’s quota on car licenses imposed last year to curb traffic congestion, which is cutting into sales.

Passenger-car deliveries fell for the first time in two years in May and registered only single-digit gains through September, partly due to Japan’s stalled product pipeline resulting from the devastating March earthquake and tsunami. The end of China’s incentive schemes that boosted vehicle sales during the global recession, rising fuel prices, taxes and parking costs also are to blame.

The market’s poor result prompted the China Association of Automobile Manufacturers in August to consider cutting its sales growth projection for 2011 by 10%-15%. Next year also looks uncertain, China expert Michael Dunn tells WardsAuto, noting tighter lending to fight inflation could slow sales gains to 5%-10%.

Light-vehicle sales in India also appear to be running out of gas. Rising inflation, the government’s undefined diesel-pricing policy, growing labor unrest, escalating materials costs and increased competition have the auto industry rethinking strategies as monthly results continue to tumble.

With the country’s factory expansion at its weakest in 20 months in August and top car maker Maruti Suzuki posting a record 25% drop in sales in July, albeit partly due to labor strikes, the fear is the emerging-market-that-could is stumbling. India’s August car deliveries slid 10.1% to 144,516 units, compared with year-ago, according to WardsAuto data.

The decline was less than July’s 15.8% drop, but belied the industry’s hope for growth at the start of the annual 4-month long festival season. A vicious cycle now is taking its toll as auto makers hike retail prices, only to offer steep discounts when sales fall. Hopes that new fuel-efficient diesel-powered cars will draw consumers so far have been stalled.

Analysts say India has tremendous growth potential driven by a young and aspiring population. The country now accounts for 5% of global vehicle production, up from 1.4% at the beginning of the last decade, according to the Society of Indian Automobile Manufacturers.

However, the industry continues to lack a broad-based components sector, as well as engineering talent needed to carry automotive suppliers forward, says a recent J.D. Power and Associates study.

The forecasting firm says India could become one of the world’s three largest automotive markets by 2020, based on its population of nearly 1.2 billion people and consumer-driven culture.

But “much of India’s future growth in the automotive sector will depend on successfully creating the infrastructure to support its economy,” says John Humphrey, senior vice president-global automotive operations at J.D. Power.

The rising influence of Brazil’s growing middle class, thanks to the country’s strong economic growth in recent years, is creating opportunities for international auto makers and suppliers, a Roland Berger study finds. The firm projects total vehicle sales could double by 2020 to 6.6 million units.

Yet, here too are signs of a reversal of fortune: The strengthening of Brazil’s currency, the real; falling domestic car sales; growing national debt; and the resulting fiscal tightening leading to higher interest rates and rising inflation have analysts calling for a downsized national growth forecast.

Such a scenario is a reminder to the Brazilian auto industry of the bad old days of a seesaw economy and fluctuating sales, stifling investment and stalling product planning. Dealers already are complaining of bloated inventories, and some assembly plants are slowing production by granting collective worker vacations.

But Brazil has proven resilient time and again, and many in the industry, while concerned, are not giving in to pessimism. Indeed, auto makers enjoyed their best August ever, breaking records in every segment. Sales of passenger vehicles, alone, jumped 7.5% according to the vehicle distributors group, Fenabrave.

While September results fell 4.6% from August to 293,617 units, they still rose 0.76% from year-ago. Production for the domestic market increased 3.3% in the year’s first nine months.

“Unlike 2008, when credit dried up, this time it seems to be a more political than economic crisis,” says Jaime Ardila, president of General Motors South America, referring to Brazil’s new government.

Anfavea, the domestic auto makers’ group, now is calling for strong sales in Brazil through the end of the year, with estimated total vehicle deliveries of 3.69 million units.

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