Auto Makers Dig In as Europe Redlines, Emerging Markets Lose Luster

The global auto industry breathed a sigh of relief in September when the president of the European Central Bank acknowledged the region’s sovereign debt crisis was critical and the bank was prepared to start a bond-buying program that would provide a “fully effective backstop” for the struggling euro.

The move is important, analysts say, because Europe’s economic quagmire is causing a high degree of uncertainly in world markets including the U.S., which is just recovering from its own recession.

Others warn that major emerging markets such as China, India and Brazil, which in the past have served as an economic boom to the West’s bust, now are softening as well and cannot be counted on, at least in the short term, to provide a safe haven for exports.

The auto industry’s confidence hit another bump with the International Monetary Fund’s warning Oct. 9 that the global economy is skidding toward another downturn that will be more complex than the 2008-2009 financial crisis.

Despite the dire warnings, WardsAuto is calling for world vehicle sales this year to jump 6.8% to 83.1 million units and climb 4.7% to 87.0 million in 2013. Europe, however, is not forecast to enjoy the same growth, with total vehicle deliveries falling 4.2% to 19.4 million but rising 2.0% to 19.7 million in 2013.

While the ECB’s stimulus plan provides some counterbalance for stability, it fails to bring immediate relief to the European Union’s struggling auto industry, weighed down by plunging sales, overcapacity, ballooning inventories, contentious price cutting and growing operating losses.

Any optimism over preserving the eurozone quickly deflated when industry executives at the Paris auto show last month warned Europe likely will not see improvement for at least the next two years as strict austerity measures and high unemployment keep the economy weak and stifle consumer demand.

“We’re bracing for more negative surprises in 2013, perhaps also in 2014,” Volkswagen sales chief Christian Klingler tells reporters at the show.

Many agree the EU’s auto industry will remain unprofitable at current discount-pricing levels. Yet, despite the cuts, consumer demand continues to plunge. Experts gathered at a conference in Brussels this month to discuss how to help the industry through the tough times agree something must be done about overcapacity.

Faced with a similar crisis in recent years, U.S. auto makers cut 20% of annual production, and in 2012 are expecting their best sales results since 2007.

Some analysts say the immediate worry for Europe is the volume brands suffering double-digit sales losses, including Renault/Dacia, Opel/Vauxhall, Peugeot/Citroen and Fiat, Alfa Romeo and Lancia.

With no relief in sight, Renault CEO Carlos Ghosn was pessimistic in his remarks at an industry gathering in New York in June. “I have absolutely no doubt the next three, four years in Europe are going to be stagnation,” he is quoted as saying.” For the moment, we’re planning for the worst, and the worst is now. There is so much uncertainty.”

Most major auto makers, including Renault, count on exports to buoy their bottom line, and many build cars overseas where they sell them. While the key Asia/Pacific markets of Thailand, Malaysia and Indonesia appear to be thriving, outlooks are cautious for some of the so-called BRIC markets that are forcing lowered expectations.

China, the world’s second-largest economy and No.1 in vehicle sales, is feeling the impact of Europe’s crisis through a drop in exports. The EU is its biggest market, with trade between the partners reportedly rising to €428 billion ($558 billion) in 2011.

The Asian Development Bank has lowered its projection for China’s economic outlook three times this year, citing weak growth in the U.S. and Europe.

In stark contrast with much of the past decade, “Investors and companies increasingly are pulling money out of China and its currency in a vote of concern over growth prospects, a development that could hinder Beijing’s efforts to spark a turnaround,” The Wall Street Journal reports.

The Chinese economy reportedly grew 8.1% in the first quarter, the weakest since the global economic crisis and now is expected to slip to 7.5% for the year, although some economists think that target could be missed as the slowdown in world markets drags it lower.

This has experts worried Asia’s powerhouse is headed for a harder landing than first thought. But so far China’s slowing inflation and soaring wages are helping offset the lowered expectations.

The central government is working to stop the slide in the economy by shifting its focus to more consumer-driven growth. This includes cutting key interest rates, launching a new round of stimulus to build more roads and other infrastructure as well as subsidizing consumer purchases, including reviving a cash-for-clunkers program that previously spurred car sales.

Overall vehicle deliveries have stalled in the past two years, slowing to 2.5% growth in 2011 and predicted to reach 5%-5.8% in 2012, according to the China Association of Automotive Manufacturers (CAAM). However, the passenger-vehicle market is expected to climb 11% this year to 16.09 million units, the group says.

WardsAuto is calling for total vehicle deliveries to reach 19.5 million in 2012 and 20.3 million in 2013. Forecasting firm AutomotiveCompass expects production of 18.2 million units in 2012 and 20.5 million in 2013.

But analysts are unable to estimate the toll China’s territorial spat with Japan will take on vehicle sales this year. Japanese auto makers in the country had lost $250 million in production by late September amounting to about 14,000 vehicles due to the fiery boycott of their products, Reuters reports. Toyota’s sales, alone, tumbled 48.9% in the month. Total vehicle delivers were down 1.8%, CAAM says.

Brazil has downshifted this year as well, hit by a slowdown in Western demand and leaving global auto makers without the remedies that helped keep their bottom line balanced during other troubled times. VW, Fiat, GM and Ford are considered the top-selling car companies in the country, but Renault-Nissan, PSA, Toyota and Hyundai, among others, have a large presence in the market.

President Dilma Rousseff’s new government is making efforts to pump life into South America’s largest economy with record-low interest rates and an onerous tax on imported cars and auto parts to help protect the domestic auto industry.

The Brazilian real depreciated 1% Sept. 17, the most since July, Bloomberg reports, after the central bank intervened to help domestic exports maintain competitive prices.

Brazil reportedly grew at an annualized 1.6% rate in the year’s second quarter that since has picked up but at a slower pace than forecast. Analysts now predict 2.0% growth for the year compared with 7.5% in 2010 during the market’s heyday.

GM in July remained upbeat, estimating overall light-vehicle sales would rise 3.0% in the year’s second half following a slump in the first six months, and end 2012 with a slight gain.

“The peak of buyers with payments in arrears or with nonperforming loans has fallen, and we are now expecting fewer negative reports from Europe, which has been affecting consumer confidence here,” Marcos Munhoz, vice president-government relations for GM Brazil, said at the time, estimating annual industry growth of 1.0% to 1.5%.

Fenabrave, the national automotive distributors’ association, was more cautious, lowering its projection for car, pickup and van deliveries from a 3.5% increase to a 0.4% drop, which would mark the first annual decline for the market since 2004.

However, August vehicle sales surprised, jumping 15.3% to 420,101 units compared with July and 28.3% ahead of year-ago, spurred by deliveries of light vehicles that set an all-time record of 405,518. Fenabrave credited the boost in demand to freer credit and the government’s extension of a tax discount through October.

The National Association of Automotive Manufacturers, Anfavea, now is expecting Brazil’s vehicle sales this year to climb 4%-5% to somewhere between 3.77 million and 3.81 million units. WardsAuto’s forecast is even more bullish, calling for 2012 sales to top out at 3.86 million, up 6.3% from prior-year, rising to 3.98 million in 2013.

Russia, too, is feeling the heat from Europe’s meltdown, with the EU being its most-important trading partner, particularly for oil and gas. The economy minister in September predicted growth would slow in the second half to 3.5% for the year, against President Vladimir Putin’s earlier forecast of 4%-5%, driving Russia to look to the East for new trading partners.

“The global landscape is changing literally as we speak,” Putin is quoted by the Financial Times as telling Asian businessmen at the recent Asia/Pacific Economic Cooperation forum in Vladivostok. While two-thirds of Russia’s landmass is in Asia, less than a quarter of its trade is within the region.

How this might play out for Russia’s auto industry cannot yet be determined, but global auto makers continue to flock to the country seeking profits from one of Europe’s few healthy regions. Some analysts predict Russia eventually will pass Germany as the No.1 car market.

New-vehicle sales slowed in September but still rose 10% to 259,582 units, taking the 9-month tally to 2,187,797, the Association of European Business Automobile Manufacturers Committee reports.

“Robust growth in the double-digit percentage range goes on, despite recent hikes in household utility costs and a widespread expectation among consumers that prices of imported cars (will) drop” following (Russia’s) World Trade Organization entry,” group chairman Joerg Schreiber says.

WardsAuto expects total Russian vehicle sales in 2012 to reach 3.18 million units, up 14.2% from year-ago, and to hit 3.44 million in 2013. AutomotiveCompass forecasts production to grow 6.0% to 18.2 million this year and jump to 20.5 million in 2013.

GM will spend $1 billion over the next five years to ramp up production, looking to more than double output to 230,000 units annually at its St. Petersburg plant, where it builds Chevrolet Cruze sedans and Opel models. It also will boost output of its Russian-focused Niva SUV to 120,000 from 70,000 last year.

Ford has planned investments as well. The Ford Sollers joint venture celebrated the 10^th year of its plant in Vsevolozhsk near St. Petersburg in July, where the first Russian Focus rolled off the line in 2002.

Fiat, showing off its 7-seat Freemont passenger van at the recent Moscow auto show, also has designs on the country, while Renault says it sees Russia challenging Brazil to become the auto maker’s strongest market.

VW predicts it will see 30% sales growth in Russia this year and will make €1 billion ($1.3 billion) in new investments. Part of that will finance construction of the German auto maker’s new engine factory at its Kaluga manufacturing complex in order to reach annual sales of 500,000 vehicles.

“Russia is the primary strategic growth market in Europe for the Volkswagen Group,” CEO Martin Winterkorn says at the engine-plant signing ceremony. “By 2018, we intend to sell a half million vehicles here.”

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