Daimler AG and other global automakers, already predicting a drop in European deliveries of as much as 5 percent this year, will probably have to lower their forecasts after demand in Germany dropped the most in 2 1/2 years last month.
Daimler Chief Executive Officer Dieter Zetsche, Fiat SpA CEO Sergio Marchionne and Ford Motor Co.’s Europe chief Stephen Odell have all said in the last two weeks that first-quarter sales in the region have been weaker than anticipated, calling into question some of their sales targets for the year.
A sudden plunge in the German auto market, which accounts for 25 percent of the region’s deliveries, is prompting companies to increase discounting, in turn pressuring earnings. Deliveries in Europe’s largest economy are set to decline to 3.04 million cars this year, 20 percent below the 2009 peak, according to IHS Automotive’s most recent estimate.
“The safe haven for the car industry, such as Germany until the last months of 2012, is now feeling the pain,” said Erich Hauser, an analyst for Credit Suisse in London. “Some carmakers might review their market forecasts for 2013, which were too optimistic at the beginning of the year.”
PSA Peugeot Citroen is currently predicting a European market decline this year of as much as 5 percent, a figure that Marchionne also used. Renault SA’s outlook is for a drop of at least 3 percent, while Bayerische Motoren Werke AG is more bullish, predicting a 1.8 percent drop. Volkswagen AG and Daimler have only said they expect a decline for the region.
VW Stock Drop
Many of those forecasts are built on the assumption that the German market will be stable. The country’s deliveries in the first quarter plunged 13 percent. Across Europe, deliveries are down 9.7 percent in the period -- with the declines growing each consecutive month -- to a record low of 3.1 million cars.
Volkswagen’s shares have dropped 19 percent this year, the biggest decline in the Stoxx 600 Automobiles & Parts Index. The stock declined for a second day and was down 1.9 percent as of 12:12 p.m. in Frankfurt trading. BMW was 0.6 percent lower after losing 2.8 percent yesterday.
The declining demand is also eating into earnings as automakers raise their incentives in Germany in an effort to grab a share of the declining market. March rebates in the country increased 0.3 percentage points from February to 12 percent, which was almost 1 percentage point higher than a year ago, according to analysis from Autohaus Pulsschlag.
Renault and Peugeot granted the highest incentives at 15.1 percent, followed by Ford at 14.6 percent, according to the German publication. Fiat’s incentive level was 12.9 percent, while the Volkswagen brand’s average rebate was 10 percent off the listed price.
Those deals still aren’t enough to entice the likes of Nadja Cromer to upgrade to a new vehicle.
“I drive a very old Opel model and hope it will go forever,” Cromer, a Frankfurt-resident and mother of two children, said yesterday. “I’m not interested in a high-tech car with many buttons.”
Manufacturers in Europe are planning more than 30,000 job cuts and five plant shutdowns in response to the crisis. That won’t be enough to reduce the chronic excess capacity in the region, which led the industry to lose around $7 billion last year, according to an estimate from Marchionne.
Carmakers will likely build 18.7 million cars this year in the region, including Russia, out of a a total capacity of 26.1 million cars, according to IHS Automotive data. That means automakers are making 7.4 million fewer cars than they’re set up to build.
“Capacity cuts are still needed in Europe,” said Michael Tyndall, an analyst at Barclays in London. “Carmakers have recently stepped up the pace of closures but I think this actually makes it difficult for them to announce further cuts until the planned closures are finalized.”
GM, which has lost $18 billion euros in Europe since 1999, confirmed yesterday it will close its plant in Bochum, Germany, at the end of next year. GM forecasts it will do “slightly” better in Europe in 2013 than last year’s $1.8 billion loss. Ford confirmed yesterday that the loss in Europe will increase to $2 billion this year from $1.75 billion in 2012.
A recession stemming from the debt crisis, which reared back up last month with a rescue for Cyprus that included taxing some individual’s bank accounts, has led to 12 percent unemployment in the 17 countries sharing the euro. German business confidence and an index of consumers’ willingness to buy fell last month following the Cyprus bailout.
“People are getting nervous in Germany after the decision on Cyprus bank deposits, so they are holding back from buying new cars,” said Peter Fuss, a partner at Ernst & Young consulting company’s Global Automotive Center in Frankfurt, who predicts the region’s car sales will decline this year as much as 7 percent. “Volatility is very high and carmakers should avoid using more discounts to gain market share.”
European deliveries at Wolfsburg-based VW, the regional market leader, dropped 9.3 percent in March, with the namesake brand posting a 15 percent decline. Sales at BMW, the world’s biggest luxury-car producer, fell 4.7 percent and Daimler dropped 1 percent.
“The reason is a massive uncertainty among customers because of the necessary reforms in many European countries to reduce their debt,” Audi CEO Rupert Stadler told German newspaper Sueddeutsche Zeitung today. Audi spokesman Juergen De Graeve confirmed his comments.
Daimler, Volkswagen and BMW are all forecasting unchanged profit this year, with VW and Daimler both saying first-quarter earnings will decline. Zetsche said this month that he will update his 2013 forecasts, in light of the weaker than expected European demand, when he reports earnings next week.
“The signs are that we are at the end of the cycle for German carmakers,” Max Warburton, an analyst at Sanford C. Bernstein Ltd. in Singapore, wrote to clients this week.
Marchionne, who uses the term “carmageddon” to define Europe’s sales crisis, said last week the Turin, Italy-based company will review its targets for the year to now include a drop in the region for 2013, which wasn’t included in the company’s base scenario at the beginning of the year.
“I can’t see the bottom,” he said at the carmaker’s annual meeting on April 9.