International -- Int'l Business: EUROPE
THE BIG SQUEEZE ON EUROPE'S CARMAKERS (int'l edition)
If they can't boost sales abroad to offset weakness at home, several takeovers may loom
One of the titans of Europe's car industry, Fiat Chairman Gianni Agnelli, retired at the end of February with one big regret. The 75-year-old Agnelli wishes he could have merged Fiat with one or more of its rivals to form a European car group. "National egos always got in the way," laments Agnelli, who tried at various times to merge Fiat with Citroen, Peugeot, and Ford of Europe. Agnelli figured that only a merger of giant proportions could produce a carmaker able to prevail in tough European and global markets.
Agnelli is gone from the scene, but his analysis still makes sense. As they gather for the Geneva Motor Show on Mar. 5, Europe's car bosses are facing another year of bare-knuckled competition in their lackluster home market. As a result, all of them are now counting on export drives and more offshore production to offset the weakness at home--a problem that will be around for a while, it seems. But if the overseas efforts falter, several of Europe's carmakers may yet succumb to takeovers, even without an Agnelli around to spark a deal.
DISAPPOINTMENT. Europe's carmakers had hoped that a record outpouring of 21 new models last year would reignite local sales. Some of the cars were a hit, such as Audi's $27,000 A4 sedan and Fiat's $11,000 subcompact Punto. But the overall response was a shrug from consumers. Industry sales edged up a scant 0.6%.
This year's outlook is only slightly better (chart). Rising unemployment and fears of lower living standards spook consumers. Just as an anxiety wave seems to be washing over the Western world in general (page 32), Europeans are shunning such big-ticket purchases as cars because "they lack confidence in the future," says Frederic SaintGeours, marketing vice-president at France's Peugeot.
Oddly enough, early sales numbers for 1996 are up. Cars sales in Germany leaped 12% in January, despite a slowing economy. But German auto makers call that a fluke, caused by the late arrival in showrooms of models launched last fall, such as the Opel Vectra and E-class Mercedes. In France, a January sales jump of 18% stemmed from deliveries postponed by December transport strikes. Now, DRI/McGraw-Hill analyst Nigel Griffiths says he may cut his 1996 growth forecast for the European market to 2% from 2.5%. Consumer worries over jobs mean "most of Europe's markets are fragile," he says.
Consumer angst is having an impact on profits. Largely because of high development and marketing costs for new models, Volvo's car unit lost $124 million in the last quarter of 1995, prompting the Swedish carmaker to cut its workforce of 30,000 by 7.5%. Ford of Europe suffered red ink in the third quarter and saw profits drop 9% for the full year. More vulnerable than some rivals because of aging models, Ford recently put some workers on part-time shifts.
Slow sales are only part of carmakers' troubles. Cash rebates, which eat into margins, have become the norm around Europe. For two years, the government has paid rebates in France--up to $1,400 a car--and most manufacturers match that amount, meaning French motorists can get rebates of up to $2,800. German rebates have also become institutionalized. These costly payments borrow from future sales. "Every manufacturer is trying to control them," says Karl Gerlinger, head of European sales at BMW. They aren't having much luck. Another problem is that cars last longer: European cars have a life expectancy of 13.3 years, up from 12 years in 1990.
CASH TROVES. In this tough environment, carmakers will offer only 10 new models this year. Peugeot's Citroen unit is about to launch Saxo, a small car priced starting at $12,160 that replaces its AX, which had been losing market share. Fiat's Lancia unit will soon launch a Saxo rival called the Y. GM is introducing a minivan model, the Sintra, which will be priced at roughly $32,000, in Europe. Especially crucial is Volvo's new S40. Priced at about $27,000, the midsize car is designed to revive Volvo's fortunes by competing against smaller BMWs and Mercedes. If the model bombs, analysts think angry shareholders could demand that Volvo seek a partner.
As they assess the gloomy European market, the region's auto makers figure they do have a few advantages. Despite weak home markets, most big companies have managed to contain costs, improve quality, and nearly wipe out their debt loads. Thanks to enhanced productivity, GM/ Opel saw its profits rise in 1995, and Volkswagen is expected to report stronger earnings, too. Some companies have cash troves. Volvo, for example, has $4 billion.
That financial strength will be needed for a global push. "European markets are tough now, which is why we're concentrating on exports," says John Towers, chairman of Britain's Rover Group Holdings PLC, owned by Germany's BMW. Rover's sales outside Europe--especially in Japan and the U.S.--jumped 38% last year, to 93,000 cars and off-the-road vehicles. While most of Europe's car factories are suffering from overcapacity, Rover will boost production around 12% this year.
Ford is now exporting 7% of its European-built Mondeos--28,500 cars--to Southeast Asia and is eyeing Japan. In April, Fiat's Brazil operation will start rolling out the Palio, the group's new subcompact "world car." Brazil has been soaking up Italian-built Fiats, too. Other Palio plants will follow in Argentina, Morocco, and possibly South Africa. France's Citroen just signed a deal to expand output in its Chinese plant, while stablemate Peugeot is searching for a partner --possibly Volvo, Fiat, or Chrysler--with which to make cars jointly in the U.S. By 2001, Peugeot Chairman Jacques Calvet aims to sell 25% of Peugeot/Citroen's output outside Europe, up from 12% now. Volkswagen is expanding in Brazil and solidifying its position as China'a biggest auto maker.
Obviously, not all of Europe's dozen carmakers can hope to soar in global markets. But it's clear that all must try, to achieve the high volumes necessary for lower costs. Those that can't build a global presence are condemned to become "increasingly dependent on the bigger manufacturers" for engines and other components, says Robert Spano, auto consultant at Ludvigsen Associates in London. Potential losers, he thinks, include Volvo, Peugeot, and Renault.
Building plants abroad may not help the problem of chronic overcapacity in Europe--at least not at first. But if competition at home can't produce the shakeout that the European auto industry needs, competition in global markets may do the trick. Foreign ventures that founder will weaken companies financially and stymie their growth, leaving them exposed to takeovers. Thus the decisive battles of Europe's auto wars may take place in the showrooms of Sao Paulo, Bangkok and Chicago. From retirement, Gianni Agnelli will be cheering.By Stewart Toy in Paris, with David Woodruff in Bonn, John Rossant in Rome, and Julia Flynn in LondonReturn to top