Online Extra: German Carmakers Pit Prestige against Recession
America's economic boom spread its largesse widely. But few benefited as handsomely as Germany's auto makers, which hooked a generation of upper-crust consumers on their sleek, powerful, and expensive roadsters and SUVs. Over the last decade, while the French and Italians all but retreated from U.S. showrooms, German car companies nearly quadrupled their share of the U.S. market, rising to 9% from 2.4% in 1993. "It's image. Germans make cars people want to drive and be seen driving: Mercedes, Porsches, BMWs, and Audis," says Peter Schmidt, head of Automotive Industry Data in Warwick, England.
But Americans may be feeling less willing to indulge themselves after the September 11 attacks, not to mention the depressing effect the stock market tumble has had on their portfolios. Now the Germans are wondering just how far their quality and luxury image will carry them in a U.S. market that is looking much softer.
Granted, the U.S. market still seems healthy at the moment. Higher incentives and zero-cost financing offers have kept U.S. consumers flocking to dealers. After a drop in September, U.S. vehicle sales surged 24% in October. But that pumped-up demand can quickly deflate when incentives are removed. Mercedes-Benz chief Juergen Hubbert worries that U.S. industry sales could plunge by as much as 25% in the early months of 2002, to an annual rate of 12 million to 13 million vehicles, from current-year levels of around 16.5 million.
A slowdown of that magnitude could dent Germany's car industry, which has been a pillar of the country's export-led economy. The U.S. accounts for 15% of Germany's car exports and an even bigger slice of the German industry's profits. At the same time, the dollar's rise against the euro has boosted the value of revenue flowing back to Germany from the U.S.
Profit margins are also higher in the U.S., where car buyers tend to load up on expensive options. According to Deutsche Bank, the dollar's strength and the rise in U.S. premium car sales account for at least 85% of the profit growth recorded by Mercedes-Benz and BMW from 1995 to 2000. Porsche, which sells more than 40% of its luxury sports cars in the U.S., relies even more on U.S. business for its high margins and profit growth.
Sales back home probably won't make up for the deficit, either. Europe's car sales are expected to slip 2% to 3% next year, and recovery hopes for the weak German market are fading. After shrinking 11% last year from 1999 levels (the historic peak was in 1992), it has lost an additional 2% this year. So far, the American and Japanese auto makers are getting hit hardest in the European market: Ford of Europe, General Motors' German unit Adam Opel, and the Japanese.
The Germans have managed to hold onto sales with a slew of attractive new models: BMW's new top-of-the-line $57,600-and-up 7 Series sedan, Mercedes' sporty $25,700 C-Class station wagon, and Volkswagen's new $10,000 Polo compact and $36,600 Passat boasting a face-lift and a powerful W8 engine. But they are clearly bracing for a chill wind: DaimlerChrysler postponed its budget-planning session, normally held in November, by a month to give division chiefs a chance to revise their numbers in the deteriorating environment. And Volkswagen, the industry leader in Europe, idled two of its biggest plants for a week in October.
For the moment, investors seem to be shrugging off the bad news. Since September 11, share prices of the German auto industry are down between 8% and 10%, a bit less than the 12% dip in the overall European auto industry. While the U.S. recession is a worry, investors seem to be betting that the German premium brands will hold up better than the middle-market makes.
German execs are giving their offerings a tune-up to make sure that happens. Porsche lost money in the last U.S. recession, but this time around, it's preparing to woo a new class of customers with its 2002 launch of the Cayenne, a sporty SUV. BMW was profitable during the last U.S. recession, and has also expanded its lineup with a $45,000 SUV and the sinuous Z3 roadster, which starts at $31,945.
Indeed, Helmut Panke, BMW's finance chief, predicts the U.S. downturn will have little impact on his company if it's a short-lived, U-shaped slump. "If it's L-shaped, lasting over a longer period, we'll have to face that like everyone else", Panke says. "But we're in a better position than most manufacturers."
Most analysts agree that Germany's high-end vehicles enter the slump with advantages. In the relatively mild U.S. recession in the early 1990s, premium car sales fell 20% from peak levels, a value that compared favorably with a 23% drop for the U.S. vehicle market as a whole, says Christian Breitsprecher, car analyst at Deutsche Bank. But he says luxury automakers' profits tend to decline less -- because premium products have higher margins to start with and because prices tend to hold up since the cars retain more value in the secondhand market.
Those advantages seem to exist this time around, as well. Just look at the difference between Daimler's two brands, Mercedes and Chrysler. So far this year, the average incentive on a Mercedes car sold in the U.S. is $573, compared with $1,782 at Chrysler, according to Merrill Lynch.
The Germans will little chance of avoiding a bumpy U.S. ride in the months ahead. But investors are hoping that Americans will retain their taste for German luxury -- and that the rough road will be short.
By Christine Tierney in Frankfurt