Much sought after optimism in the European vehicle market has been hit by gloomy forecasts from leading business analysts who have warned of an increased risk to carmakers' cash flows in the first half of 2010 and a threat to half of all European suppliers, including finished vehicle logistics providers. There is also concern that the high levels of government subsidies supporting car sales could ultimately weaken the ability of carmakers to return profits, as well as over-saturate the new vehicle market, cutting off growth in the medium term.
Assessing the risk to sales volumes in the wake of state supported schemes, Credit Suisse downgraded the European automotive market this week and anticipated significant disruption to volume, price and mix.
The company said carmakers would need to consider disposing of assets and equity issuances, as working capital reversals might fail to restore balance sheets. It has consequently revised price targets on European automakers.
Adding to the pessimism, the AlixPartners 2009 Automotive Review warns that government incentive schemes threaten over-saturation of the market and risk a sudden absence of demand, especially when the funding for such programmes run out.
That’s if there is adequate demand in the first place. In the UK sales slid 16% in June, a marked improvement from recent months, but nevertheless suggesting scrappage incentives maybe less effective there than has been in Germany or France, for example (where the subsidies are also more generous). “Compared to other European countries, the take up is abysmal,” Peter Schmidt, Managing Director of Automotive Industry Date, told Bloomberg.
AlixPartners, which is currently handling the restructuring of General Motors in the US, predicts fierce consolidation in the industry as carmakers face overcapacity and high levels of debt. It suggests that European carmakers could see a loss of €1,800 ($2,500) on every vehicle sold this year.
Moreover, the depletion of excess demand and conservative consumer behaviour may mean vehicle sales in Europe only reach the pre-crisis levels again in 2014.
While the situation for inbound and spare parts providers is challenging, the larger companies are likely to successfully offset the problem across their wider and diversified business segments, said Transport Intelligence Senior Analyst, Thomas Cullen. But for finished vehicle carriers “the situation is dire”, he said.
This view is challenged by ECG President Costantino Baldissara, who said that “talking of a depressed marked until 2014 makes as much sense as talking of 16 millions cars sold in Europe next year.
“Let's stick to facts,” he told Automotive Logistics. “The global economy – the real economy, not the financial world – has bottomed out in the first quarter and is now slowly building up. At the same time, consumer confidence is positive, the latter being the prerequisite for a recovery in car sales.”
There is worry, however, that the critical support being lent to the automotive industry, particularly in Europe, North America and Japan, could prevent it from sorting out its chronic problems, which saw many companies heading for deep financial trouble long before the credit crunch
“If governments keep pumping money into them you will just end up with zombie companies that are not going anywhere,” continued Cullen. “You need profitable companies who make enough cars to make money and can support design and research of new models and technology.”
Baldissara suggested the automotive industry will continue to be at risk “not because of the market trend, but because of its structural production overcapacity”, said Baldissara. However, this is not the case for finished vehicle providers.
“On the contrary, finished vehicle logistics suppliers slimmed down immediately once the crisis exploded and, in terms of transport capacity, are now in the position to serve the market,” he said.
“It is a challenging time for finished vehicle operators: financial strength is the name of the game! Indeed, with the OEMs having their own survival problems, only the bigger and healthier LSPs will survive the next 12 months.”
