The importance of positioning and not being ‘stuck in the middle’:
Too many cars, too few buyers
Luxury cars are speeding ahead; lesser brands are stalled
The Economist, Feb 18th 2012 | BERLIN, LONDON AND PARIS | from the print edition
GERMAN autobahns are unlike motorways elsewhere—on some you can drive as fast as you like. Germany’s car industry is also in a class of its own. Its three big premium brands, BMW, Mercedes-Benz and Audi (part of Volkswagen), are working flat-out to meet demand for their beautifully engineered, stylish motors. The emerging world’s new rich love them. Germany’s domestic car market is doing nicely, too: sales grew by 9% last year.
The contrast with the rest of Europe is stark. Car sales fell by 2% in France, 11% in Italy and 18% in Spain last year. And status-conscious consumers in China are not interested in cars that are merely pretty good. So Europe’s volume—i.e., non-premium—carmakers are in trouble. France’s Peugeot-Citroën, Italy’s Fiat and Opel-Vauxhall (the European arm of GM, America’s biggest carmaker) have all seen their European sales fall. To shift their wheels, they have to offer eye-watering discounts, sometimes 20-30% off the list price (see charts). Britain’s car market also shrank, by more than 4%. But its carmakers, now mostly foreign-owned, enjoyed an export boom and their production rose by 6%.
On February 15th Peugeot-Citroën’s parent, PSA, said its carmaking business had an operating loss of €92m ($121m) last year. Fiat’s boss, Sergio Marchionne, recently revealed that the Italian maker had lost €500m last year in Europe. As The Economist went to press, GM was expected to reveal heavy losses at Opel-Vauxhall, to add to the $14 billion that its European division is said to have lost since 1999.
Last year 13m new cars were registered in the European Union, 2.5m below the peak in 2007, taking the EU car market back to where it was in 1997. Sales will fall again this year, for the fifth successive year: Peugeot-Citroën predicts a 5% fall across Europe and a 10% drop in France.
In the wake of the 2008 financial crisis, many European governments propped up car sales with scrappage schemes that subsidised motorists to trade their old bangers for new models. But all they seem to have done is bring forward purchases that would have been made anyway, and overall they have not saved jobs, says Ferdinand Dudenhöffer, a car expert at the University of Duisburg-Essen. In January France’s car sales were 21% lower than a year earlier, when its scrappage scheme was still in force, with Peugeot-Citroën and Renault especially badly hit. Peugeot, the weaker of the two, wants to cut 6,000 jobs.
Per ardua ad Astra
The combination of falling sales, idled production lines, deep discounts and rising losses makes Europe’s weaker volume makers look rather like GM and Chrysler did before they were bailed out by the American government and pushed through bankruptcy proceedings. But unlike pre-crisis Detroit, Europe’s troubled makers are not turning out clunky, unreliable lemons. Fierce competition has forced them to improve greatly the quality of their cars, says Richard Bremner of Autocar magazine. Each will have some impressive new models to display at next month’s Geneva motor show. For example, Peugeot is pinning its hopes on the 208, a new “supermini”. Fiat will launch a larger version of its 500 minicar. Opel will launch a souped-up version of its Astra family car.
However, building good cars is not enough when rivals are doing better still. First, the troubled European volume makers have to contend with Volkswagen. The German firm’s huge scale, global spread and “slightly premium” image allow it to drive on ruthlessly down the outside lane of Europe’s price war. Max Warburton of Sanford C. Bernstein, an investment bank, notes that since 2000 VW’s European market share has risen relentlessly, from 16% to 24%. With its ability to match rivals’ discounts, it looks capable of pressing on until others start going bust, he reckons.
Peugeot, Fiat and Opel also face intense competition from Asian producers, especially South Korea’s Hyundai and Kia, which are continuing to build capacity in the Czech Republic and Slovakia respectively, as well as importing cheap, sharply styled cars from back home. Last but not least, they are seeing the top end of their market being nibbled away by the German premium makers, which have broadened their ranges of cheaper entry-level cars: BMW with the Mini and 1 Series, Mercedes’s A-Class and Audi’s A1. The premium carmakers have proved far more successful at getting motorists to identify with their brands, and at finding out what people will pay extra for.
One possible reason for this, muses Thierry Huon of Exane BNP Paribas, a stockbroker, is that the bosses of the German firms tend to be lifelong “car nuts”, whereas the French carmakers’ bosses tend to have parachuted in from other industries. Peugeot’s Philippe Varin came from Corus, a steelmaker; Carlos Ghosn of Renault from Michelin, a tyremaker.
Renault has had some success with the low-cost models produced by its Dacia subsidiary in Romania. But as far as investors are concerned its main asset is its shareholdings in Nissan of Japan, in Mercedes’s parent company, Daimler, and in Volvo Trucks. As a new report from HSBC notes, in 2007 Renault’s own carmaking operations were in effect valued at €11 billion; recently the market has given them a negative valuation of around €7 billion.
Peugeot-Citroën likewise has a stake in Faurecia, a successful maker of parts. But like Renault it is heavily dependent on the weak west European market. It is also worryingly dependent on selling cars in kit form to Iran, which account for 13% of Peugeot’s sales (compared with around 6% for Renault), and which would be vulnerable to any conflict over Iran’s nuclear programme. Renault has gone further than Peugeot in internationalising its production—this month it opened a new plant in Morocco. Peugeot wants to follow suit but seems to have doubts about whether it can afford a big planned expansion into India.
Fiat lux bad
Fiat has been suffering from a decision taken in the midst of the financial crisis: to hit the brakes on its investment in developing new cars. Given the resulting sales slump, it is fortunate that its decision to buy a controlling stake in Chrysler has turned out so well. In its bankruptcy Chrysler was shorn of much of its excess capacity in North America and various other liabilities. It has now bounced back to profitability. Without it, Fiat would be in dire straits.
However, Fiat cannot keep running up such huge losses in Europe. Mr Marchionne admits that it needs another partner to create a global carmaker with the scale to take on VW. In recent weeks speculation has centred on a marriage with Peugeot. But to work, this would require big production cuts in one or both companies’ home countries, which might be too politically controversial. Ditto a Fiat-Opel union. Given its near absence from booming Asian markets, Fiat’s ideal partner would be a firm like, say, Mazda, now seeking a new relationship after its divorce from Ford, or Suzuki, another Japanese maker which is trying to unwind a cross-shareholding with VW.
Likewise, Peugeot-Citroën might fare better with an Asian bride: Frédéric Saint-Geours, an executive close to the founding Peugeot family, insists that besides any suitor needing to have a compatible strategy and potential synergies with his firm, a condition of any alliance would be that his company remains independent. But it is intriguing that the big achievement of his boss, Mr Varin, at Corus was to sell it to Tata, an Indian giant (with a growing carmaking division).
GM dallied with selling Opel-Vauxhall in 2009 but changed its mind. Now, as its losses persist, there are signs that it is losing patience again. GM has recently put several new directors on Opel-Vauxhall’s board, including Thomas Sedran of AlixPartners, a consultancy which advised GM on its turnaround. On February 8th the Wall Street Journal quoted unnamed GM sources as talking of closing some of its European division’s plants.
The abortive sale has left the Opel brand even more “soiled” in continental Europe, says Autocar’s Mr Bremner. The Vauxhall brand, under which its cars are marketed in Britain, is still the country’s second-biggest seller, but it is believed that 80% of its sales go to fleet and company buyers, who expect even bigger discounts than individual motorists.
As the losses mount in European volume carmaking, it is becoming ever clearer that the continent is simply making too many cars in too many factories. Christoph Stürmer of IHS, a data provider, reckons that in Europe (including Russia and Turkey) there was capacity to make about 25.5m cars last year, but only 20m were actually made. This year he expects capacity utilisation to fall from 79% to 70%, as sales fall and the Koreans and German premium carmakers open new production lines.
Recent cost cuts may have reduced European carmakers’ break-even utilisation rate to perhaps 75%, says Mr Stürmer. But that still means capacity must fall by about 1.2m cars for the industry to break even. Closing Opel-Vauxhall’s Bochum plant in Germany and Ellesmere Port in Britain, as GM is reportedly contemplating, would cut only about a third of this.
There have been some cuts and cost savings: Opel and Fiat have closed a factory each; Saab, a Swedish carmaker, has recently gone out of business; and Mitsubishi of Japan is giving up a factory in the Netherlands. Several companies have struck deals with unions to cut labour costs, and with other carmakers to collaborate on developing new technologies. But this will probably not be enough.
Making cars in Europe is fearfully expensive. A Renault executive told a French Senate inquiry this month that it is €1,300 cheaper to make a Renault Clio in the company’s plant in Turkey than in the Flins factory in France. As new capacity is built at a rapid pace in emerging markets, such cost differences will get even harder to ignore.
Cutting capacity is costly, however. By Mr Warburton’s back-of-an-envelope calculation, if GM closed Opel-Vauxhall, laying off its 40,000 workers might cost, say, €200,000 each—a painful €8 billion.
Another obstacle is politics. When Peugeot announced its planned job cuts, its boss was summoned before President Nicolas Sarkozy, who has also grumbled about Renault’s délocalisation of jobs to foreign plants. Politicians are obsessed with assembly plants, which some see as a symbol of national virility. This is perverse. Renault argues that the value added in assembly is only 15% of the total. It and Peugeot-Citroën are most concerned to keep high-value engineering and design work, and the production of engines and transmissions, at home and would like to move more assembly work to cheaper places. It seems a reasonable survival strategy, if the politicians would let them.
Europe’s struggling volume makers have all been trying to move their brands upmarket, launching higher-priced small cars—such as Fiat’s new 500L minivan—in the hope of becoming as profitable as the German premium makers. This is another sensible idea. But moving upmarket takes decades, as Audi’s painstaking ascent since the 1980s has shown. Opel, Peugeot and Fiat don’t have that much time.
from the print edition | Business