Rating Firms Forecast Falling Car Sales, Rising Overcapacity for Europe Next Year

Rating Firms Forecast Falling Car Sales, Rising Overcapacity for Europe Next Year

PARIS – Europe’s car sales, down 0.9% through October, are expected to fall another 3%-5% in 2012, and emerging markets won’t grow fast enough to buffer the shock, a leading French insurance-rating company says.

Overcapacity in Europe could hit 20%-25% next year, the firm Euler Hermes predicts. At that level, according to a general rule of thumb, profitability is doubtful.

Since the 2008-2009 global financial crisis, major auto makers have shifted resources to China, Russia, Brazil and India, but Euler Hermes sees little help there in 2012.

China’s car-sales gains of 30% in 2009 and 40% in 2010 attracted massive new investment, but this year’s growth has slowed to 5% and next year is expected to reach 4%-5%. The result will be pressure on retail prices. Brazil’s new-car market should grow 2% in 2012, say the analysts, but Russian and India will be flat.

Fitch Ratings, based in New York, has a bit more optimistic view, forecasting European car sales to slip 1.0% and to grow 6%-8% in China.

Yann Lacroix, who heads the Euler Hermes report, says Europe’s overcapacity could lead to painful restructuring. Since 2007, production has fallen 11%, from 23 million vehicles to 20.5 million. Yet few plants have been closed, largely because of national efforts to prop up employment.

U.S. output has been cut in half since 2000, but the number of workers has followed suit, so the restructured industry there is in better shape, Euler Hermes says.

Fitch agrees on that point, arguing Ford and General Motors likely will weather a bad 2012 sales year, along with Volkswagen, Daimler and Hyundai-Kia.

Euler Hermes anticipates growth of 8%-10% in the U.S. market next year. In Europe, the firm says private buyers will purchase 700,000 fewer vehicles next year. Sales are predicted to drop 3% in the U.K., 4% in Italy and 1.5% in Germany. Spain, the region’s fifth-largest auto market, is expected to remain flat.

In France, Lacroix says “the more time passes, the more I think that we’ll be at minus-5% to minus-10%.”

Euler Hermes made the same prediction last year for France in 2011, and it didn’t happen. Government incentives in 2009-2010 pulled ahead sales of 500,000 vehicles, Lacroix says. But price-cutting by auto makers this year added 200,000 new sales, and after 11 months the French passenger-car market was down just 0.3%.

Euler Hermes predicts new-car purchases by individuals in 2012 will drop 10%, or 200,000 units.

Overcapacity problems particularly are serious in France, the analytical firm says, estimating a minimum of 25%. Between 2007 and 2011, French production tumbled 36.7% to 1.9 million units. In Spain, where sales were down 19.7% through October, output will hit 2.3 million, surpassing France.

“The market position of the French auto makers on entry-level and mid-range vehicles explains why they have largely outsourced production to low-cost areas,” Lacroix points out.

Employment at Renault and PSA Peugeot Citroen has declined 26% since 2007, but still not as fast as production, he says. PSA recently announced restructuring cutbacks of 6,000 workers in Europe, although it continues to build some small cars at factories in the Paris region. Renault already has moved nearly all of its small-car production outside France.

PSA deliberately is trying to move its vehicle range upscale through the Citroen DS line and special Peugeots, such as the RCZ sports car, 5008 and 3008, in order to benefit from better margins enjoyed by the German auto makers.

Fitch found in its study through September this year that the operating margin of volume auto makers averaged 5%. PSA saw 2.4% and Renault 2.5% in the period. In comparison, BMW was at 12.8%, Audi 12.4% and Mercedes-Benz 9.4 %.