Euro to Ease Europe into Unified Market

Automotive experts agree that forecasting Western European events 20 years out is nearly impossible. No one could have predicted the fall of the Berlin Wall, the Russian political upheaval and economic crises, or even the DaimlerChrysler AG merger.

But the Western European vehicle market is set to change, albeit more evolutionary than revolutionary.

"We are at the beginning of what could be big change in the European market," says David Leggett, automotive analyst with London's Economist Intelligence Unit (EIU).

Western Europeans will move away from nationalistic car buying, he says, model segments will shift, and Europe's traditional leading markets will start to feel the heat of competition from emerging economies.

Say goodbye to the days of country-loyal shoppers. Gone will be scenes of the French buying exclusively French-made vehicles or Italians buying only Italian. With the advent of the euro, Western Europe is finally set to become one cohesive car market.

Market-share differences will be ironed out, and consumers' preferences will converge across the continent. Customers will look at the region as a single unit and be able to price a vehicle without exchange rate risks or tax complications.

Although Peugeot SA and Renault SA may lose their lead in France, Fiat SpA sales could be hurt in Italy, and Saab Automobile and Volvo Cars might not be No.1 in Sweden, car companies will pick up more sales overall from markets formerly inaccessible to them.

And while an international free-for-all might strike fear in the hearts of dealers counting on local sales, automakers are preparing for the inevitable by increasing their range of products and developing new segments.

One thing that won't change down the road is Europeans' love for small cars. High fuel prices and increasing highway congestion will continue to plague the region. This means the C- and B-segment (intermediate and midsize) will see sales growth. Demand for multipurpose vehicles and small sport/utility vehicles (SUVs) will see expansion, along with new entries. Roadsters and performance luxury sedans will enjoy a relative growth spurt.

Micro cars, such as the Smart, will find their niche in an urban setting that continues to become more crowded. Minicars, already popular in some markets, are set to grow throughout Europe as well.

But the future allows no time to become complacent. Analysts warn that Western Europe's car market already is saturated and will not see substantial growth for at least another decade. The traditional leading markets of Germany, France and the U.K. will remain on top, but with cars being replaced, not added.

Instead, look for growth in Spain and Portugal. "These two markets ought to be quite a bit bigger," Mr. Leggett predicts.

One reason is that both currently have relatively low levels of vehicle ownership. For every 1,000 people in Spain, for example, only 400 own vehicles. In Portugal it's 330/1,000. Compare this to 450/1,000 in France and 520/1,000 for Germany. "There is quite a big growth potential there," Mr. Leggett says.

But automakers, mostly, will have to continue eastward for any substantial growth. Eastern and Central Europe, plus Russia, hold the most exciting prospects for OEMs in the region. Poland should be able to retain its title as the largest market in Central Europe. Sales are expected to reach 500,000 units this year, grow to 700,000 by 2005 and jump to 1 million in a decade, EIU studies show. Sales in the Czech Republic are expected to increase from 140,000 vehicles this year to 250,000 by 2005. The situation looks fairly positive for Hungary, as well.

Russia - tempting as it is with all that potential demand - raises risks. But when (or if) the country's rocky economic and political uneasiness evens out, car sales are predicted to boom.

Vehicle sales in Russia could reach 800,000 units this year, 1 million by 2003 and 2 million by the end of the next decade by Mr. Leggett's calculations.

Even so, there still remain many unresolved questions regarding Russia's auto industry. While numerous joint ventures have been announced, only a few have begun limited production, such as BMW's assembly plant in Kaliningrad. BMW and Russian automaker Avtotor began pilot production of the 5-series during the summer. The plant now builds the 523i and 528i and will soon start Land Rover Defender assembly.

The future of Russia's largest automaker also remains in question. AvtoVAZ, which builds the ubiquitous Lada, is heavily in debt and has cash-flow problems.

The company has been negotiating with General Motors Corp. for more than a year, but has yet to sign a definitive agreement.

Whether we'll see a GM/AvtoVAZ car in the next 20 years is hard to say. But Europe's future is driving toward change, and things unimaginable 20 years ago no longer are impossible.