PSA Peugeot Citroen, Renault SA and Fiat SpA, the automakers relying the most on European sales, are being pushed by market leader Volkswagen AG into a price war that threatens their pledges to increase profits.
Fiat is offering French customers 4,000 euros ($5,500) off the 17,000-euro price of a Sedici sport-utility vehicle, while Renault has slashed the advertised U.K. price of a Clio model by 22 percent to 9,995 pounds ($16,200). VW’s new Passat, introduced in November, was priced 675 euros less than the previous version of the mid-sized car.
Volkswagen is “lowering prices from a position of strength,” said Max Warburton, a London-based analyst at Sanford C. Bernstein. “Pricing took a hammering in the recession and apparently got worse in the fourth quarter, despite the tentative economic recovery.”
The European auto market is set to shrink for the fourth consecutive year in 2011 following the end of government incentives that boosted sales during the recession. Last year, Renault sold 63 percent of its cars in Europe, compared with 61 percent for Peugeot and Fiat’s 46 percent.
Of the 7.14 million vehicles Volkswagen sold last year, 3.31 million, or 46 percent, were delivered in Europe. Wolfsburg, Germany-based VW last week reported 2010 net income of 6.84 billion euros, the highest in the auto industry.
The European car market contracted the last three years, declining 14 percent to 13.8 million deliveries in 2010 from 16 million in 2007, according to the European Automobile Manufacturers’ Association. It may shrink as much as 2 percent this year, Renault forecast Feb. 10. The French market may contract 8 percent, Peugeot Chief Executive Officer Philippe Varin said at the Geneva auto show today.
Carmakers that are holding back from discounts are already losing ground, Warburton said, citing market-share losses at Ford Motor Co. and Peugeot. In January, Ford’s European market share fell 0.7 percentage point to 8 percent, data from the Brussels-based industry group showed. Peugeot’s market share slid 0.3 percentage point to 13.6 percent. Fiat’s share tumbled 1.7 percentage points to 7.5 percent.
Volkswagen added 1.5 percentage points for a share of 22.1 percent, including Seat, Skoda and the Audi luxury brand.
Peugeot, Europe’s second-biggest carmaker, predicts average prices may fall by 1 percent after last year’s 2.2 percent decline, sales chief Jean-Marc Gales said in an interview.
Paris-based Peugeot may abandon its target for sales to European fleet operators as discounts reach “the 20 percent order of magnitude,” he said. The carmaker is three percentage points away from an 18 percent fleet market-share goal set for 2012.
“There are fleet deals I’ve turned down because they would have harmed profitability,” Gales said. “If I have to choose between hitting the 18 percent target and profitability, I’ll choose profitability.”
The company may set up an online-only sales outlet for a new low-cost vehicle brand it’s looking at developing for Europe, Gales said today in Geneva.
Last month, Peugeot raised the target for savings and additional earnings for the three years through 2012. Renault gave a 2013 operating-margin target of 5 percent by 2013, a level it last achieved in 2004. Based on the higher end of Fiat’s forecasts confirmed Jan. 27, trading profit for the company, which no longer includes truck and tractor operations, may rise as much as 7.9 percent.
“Price deterioration has the potential to make 2011 even tougher than 2010,” said Arndt Ellinghorst, an analyst at Credit Suisse Group in London. “It leaves us skeptical about volume carmakers’ expectations of rising profitability.”
Credit Suisse has an “underperform” rating on Peugeot and Fiat shares and “neutral” for Renault. In 2010, Renault and Peugeot were the worst performers on the Bloomberg EMEA Auto Manufacturers Index, rising 20 percent each while the benchmark added 29 percent. This year, Peugeot and Renault have each risen 2.1 percent before today. Fiat, which separated its industrial operations in January, climbed 0.4 percent.
Peugeot fell 1.1 percent to 28.69 euros at 5:05 p.m. in Paris. Renault lost 1.7 percent to 43.67 euros. Fiat slipped 0.5 percent in Milan, while Volkswagen’s preferred shares dropped 1.6 percent in Frankfurt.
Europe’s failure to shut factories during the crisis is in part to blame for the tough pricing environment, said Jeff Schuster, a J.D. Power & Associates analyst in Troy, Michigan.
U.S. carmakers have taken out capacity of 1.5 million vehicles since 2006, putting their recovery two years ahead of European rivals that used state-backed crisis loans and subsidies to avoid closures, Schuster said. “By relying on scrappage programs, Europe has avoided looking in the mirror and dealing with the fundamental issues,” he said.
Discounting is most aggressive in Spain and Italy, where carmakers continue to plug the gap left by the expiry of scrapping bonuses, according to JATO, a Harrow, England-based automotive consulting firm.
In Germany, Europe’s biggest auto market, average discounts climbed to 11.1 percent in January from 10.7 percent in December, according to a report by Autohaus Pulsschlag, a motor trade publication. Fiat, Renault, Ford and Peugeot were among the biggest discounters identified in that study.
“Europe is a very difficult, competitive market,” Philippe Klein, Renault’s executive vice president of product planning, said in an interview in Geneva. “We’re working to improve our brand image and pricing in the medium term.”
Some executives are more optimistic about the market outlook. Fiat expects a recovery in the European market starting in April, head of sales Andrea Formica told reporters in Geneva.
Ford said it doesn’t plan to match competitors’ excessive discounts to buy share or volume in Europe.
“It’s still going to be tough, there’s still going to be a discount,” said Stephen Odell, CEO of Ford’s European unit. “I don’t think you can sit there and say we’re not going to discount because we’re a large-scale manufacturer. But as you saw last year, we won’t discount to the levels of destruction where it doesn’t make sense to chase share.”
Discounts are also becoming harder to track as carmakers shift from cash rebates to less tangible incentives such as extended warranties, free servicing and special editions that bundle optional extras at a knock-down price. Manufacturers are keen to move away from cash discounts because they hurt second-hand values, thereby increasing financing costs for new vehicles, said Gareth Hession, JATO’s vice president for research.
“It’s not uncommon to have six or seven incentives, with different possible combinations -- to the point where they are getting too complex for customers,” he said. “Even the dealers need daylong meetings just to understand what the new program is.”