German Auto Makers See a Crash Ahead

Anxious consumers aren't buying and export earnings are down. Now, the industry fears a tax hike on company cars will further depress sales

For anyone feeling flush, it's a deal: A year-old BMW 745i sedan priced at $70,000, a 26% markdown on the price of a new model. Parked in a showroom in Dreieich, a small town near Frankfurt, it's one of 1,000 used BMWs for sale at the dealership.

Few customers are kicking any tires, however, because Germans aren't feeling flush. The economy stalled in the spring, bankruptcy and jobless rates are rising, and car sales are falling for the third year in a row.

Now, proposed tax increases are threatening to crush any recovery in the German car market. To cut the growing budget deficit, Chancellor Gerhard Schröder has proposed an array of new taxes and tax increases in a supplementary government budget for 2002. Among its revenue-raising proposals, plans to raise the monthly tax that individuals pay on company cars. The tax, which has been calculated by a formula based on 1% of a car's sticker price, will now be based on 1.5% of the sticker price.


  That may not sound like much, but it would increase the monthly tax on a typical $55,000 company car -- typically, a well-equipped Mercedes-Benz E-Class or BMW 5 Series -- by one-third, or by about $135 to $530. Looking across rows of new and hardly used Beemers at the Dreieich dealership, salesman Florian Pokahr believes a higher tax is bound to depress demand. Notes Pokahr: "We depend on business customers."

So do Germany's auto makers. BMW, Audi, Mercedes, and Volkswagen ring up 90% of the 500,000 annual company-car sales. This niche market accounts for only about 15% of total car sales, but it's a lucrative business. Company cars tend to be pricier and more lavishly equipped than those people buy for themselves.

A higher tax on company cars is likely to hurt auto makers by encouraging sales of cheaper models, ones with slimmer profit margins. BMW's Sales Director Michael Ganal says the last big car-tax increase, which came in 1996, reduced sales in the upper premium segment -- BMW's 7 Series, the Audi A8, and Mercedes' S Class -- by 25%.


  An tax increase also would hurt suppliers, as buyers can be expected to cut back on fancy options such as sunroofs and electronic gadgetry. "We need this like a hole in the head," says Bernd Gottschalk, head of the German auto makers' association.

Indeed, the German car market is already one of the most sluggish in Europe. This year, sales are expected to total around 3.3 million units, their lowest level since 1995. Since 1998, sales have fallen 13%, as higher fuel taxes and consumers' fears about the economy and diminished job prospects have damped demand.

Until now, brisk exports have underpinned Germany's auto industry. In 2001, car exports totalled a record 3.6 million units. But with sales in the U.S. and European countries outside of Germany declining, 2002 exports are expected to slip to 3.4 million units. Plus, the euro's rising strength against the dollar means a diminished bottom line.


  Investors' worries about the new tax have put the brakes on German car stocks over the past month. The overall European auto sector has remained flat, but BMW's shares have dropped 10% and DaimlerChrysler's (DCX ) by 3%.

The German Parliament, controlled by Schröder's newly elected coalition of Socialists and Greens, is expected to approve the tax increase soon. Auto executives, however, are lobbying state governments to defeat the planned boost in company-car taxes early next year. That is when the legislation comes before the Bundesrat, the bicameral legislature's upper house, where the states have more say.

The proposed tax is especially worrisome to Bavaria, Baden-Wuerttemberg, and Lower Saxony, where the auto industry employs hundreds of thousands of workers. If the increase goes through, "the consequences will be a reduction in jobs and a fall in tax revenues," predicts BMW's Ganal. "Everyone will lose out." It's a message he hopes Germany's local politicians will take to heart early next year.

By Christine Tierney in Frankfurt

Edited by Thane Peterson

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE