Europe Almost at its Peak Incentives help push sales to near-record levels

It's almost there, but not quite.

The European auto market nearly reached peak levels in 1997 and it may get even closer in 1998.

By the end of this year, European sales are expected to increase 3.9% to 13.3 million units - just 1.5% short of the all-time high reached in 1991. Next year, sales are expected to approach 13.5 million.

Sales increases since 1993 are a result of government incentive programs in Europe. In 1994, incentives in France and Spain helped push sales up 5.3%. Last year, French incentives again propelled the market up 6.3% when it was expected to be almost flat. In 1997, the surge in Western Europe comes as a result of incentives in Italy.

"It's been strongly influenced by these micro events in the car markets," says Nigel Griffiths, automotive analyst for Standard & Poor's / DRI in London.

And while U.S. automakers talk of falling profits in Europe, local manufacturers are faring well for the year. Much-troubled Renault SA and Fiat SpA saw consolidated revenues jump 10.9% and 55%., respectively for the first nine months of 1997.

For 1997, the Italian market is expected to swell 33% from 1996 levels with estimated sales of 2.3 million units. As expected, Italy's Fiat SpA will benefit most from the incentive program. Enjoying a near 40% sales growth in Italy, the automaker's consolidated operating income was up 55% during the first three-quarters of 1997.

The Italian incentives also were especially kind to French manufacturers who are still hurting from low sales in France, a result of last year's incentives.

By November, Renault dipped only 0.39% while Peugeot was down 3.33%, even with a home market off by 23.7%.

Like France, the German market had a sticky first half. But by the end of the year, Germany is expected to come in 1% to 2% ahead of 1996 with sales reaching about 3.5 million units for the year.

Unlike France and Germany, the U.K. performed better than expected during 1997. Economic recovery was higher than anticipated and the market is charted to grow by 6.4% to 2.15 million units.

"(The) U.K. is running better, we are seeing a stronger Germany, Italy is very strong now ... so we are seeing a stronger Europe," says John F. (Jack) Smith, General Motors Corp. chairman.

Among the surprises for 1997 were the Japanese, which powered ahead with a recovery that was stronger than expected. Collectively, they gained share during the later months of the year, and by the end of 1997 they will control 11.2% of the market.

But Japanese companies are just getting back to where their market share was in 1993. Sales have plateaued and will most likely fall again. Market share is expected to just touch 11% in '98.

For the rest of Europe, 1998 looks to be slow but steady with only a collective 1.1% growth rate. Look for strength in the German market for 1998, Mr. Griffiths says. The market should increase about 3%. Watch for France's comeback with more than 9% growth for the year. The country is expected to rebound with 1.9 million sales, compared with an estimated 1.7 million in 1997.

A reasonable performance is expected by the U.K., which is estimated to be up 3%. Next year starts Italy's two-year downward spiral with the market declining 10% to 11%. The only increase is likely to be a result of new emissions and safety tests that came into place during 1997 and forced some owners to take older vehicles off the road. The effect of these new tests will be felt for the next two to three years and will be responsible for 5% to 8% of sales.

Volkswagen AG looks to be next year's winner by continuing its solid performance in Western Europe. The company has more than 17% of the market and will consolidate this lead in 1998. The company's VW brand, which was down about 2% in 1996, is expected to give a strong performance and help it gain another half percentage point of market share.

While 1998 looks good for VW, it may be difficult for Ford Motor Co.

The automaker is having a tough time with its product cycle. Ka has cannibalized Fiesta sales, and when the company's new Escort is introduced late next year it will face strong competition from VW's new Golf and Adam Opel AG's new Astra, both of which by then will have been on the market for several months.

Additionally, there are no incentive plans on the horizon for Ford or any other automaker to fall back on.

"There's a feeling that the general economy in Europe is more positive than it was last year, so there's a sense that Germany should be recovering a bit and France should be recovering a bit," says Francois Castaing, vice president Chrysler Corp. International Operations, "(But) if Europe recovers, it is not going to be a rocketing recovery."