AUTO ANALYSTS expect profitability at European carmakers to continue rising through 1999. The net profits of European automakers rose 61.3 percent in 1997 over the previous year to a combined total of $6.5 billion.
'The main driver is cyclical: the improvement in the European economy,' said Gregory Melich, auto analyst at Morgan Stanley in London. 'Most carmakers are still benefiting from the strength of the dollar, although the exchange rate effect will fade.'
Melich said the European car market is 'getting back to trend after five or six years of running under trend. Demographics suggest the market should average 13.6 million cars. This year we expect sales of 13.74 million, and 14.02 million in 1999.'
All but two European producers - Saab Automobile and PSA/Peugeot-Citroen - made a profit in 1997.
Profits at General Motors' Opel/Vauxhall operations fell 39.5 percent to $471 million. Ford of Europe reversed a 1996 loss of
$291 million to make a net profit of $273 million.
The combined net profits of the three major US manufacturers were $16.2 billion, including their consolidated operations in Europe - up 27.8 percent from 1996.
Japanese producers saw their net profits fall 13.3 percent to a total of $5 billion.
Although global carmakers' return on sales rose in line with the 22.1 percent rise in their profits, the auto industry still suffers low returns compared with many other industries.
Analysts believe earnings will continue to rise at European manufacturers through 1999. 'Competition will get tougher, but the economic outlook is still reasonable next year,' said Stephen Reitman, automotive analyst at Merrill Lynch in the UK. 'However, the European market will become more open when quotas for Japanese imports are removed in 1999.'
Only two European carmakers made a loss in 1997: Saab Automobile and PSA/Peugeot-Citroen. Saab's loss increased to $242 million from $157 million in 1996. PSA's net loss was the result of restructuring costs, not an operating loss. Renault and Ford of Europe returned to profit in 1997 after heavy losses the year before.
Reitman expects operating profits to improve at Renault and PSA. 'Renault is, of course, much further down the line, both in creating popular products and profits,' he said.
'PSA has the right strategy now,' said Melich. 'What (Chairman Jean-Martin) Folz is doing there is revolutionary for PSA, but no longer in the rest of the industry. The real challenge is to take that three- or four-year process and do it in two years.'
Both Daimler-Benz AG and BMW Group raised their return on sales significantly from the 1.6 percent they achieved in 1996. Daimler-Benz increased its net profit last year by 90 percent to $1.8 billion, while BMW improved its net profit by 52 percent to $699 million.
'BMW has been helped less by the weakness of the German mark than Daimler has,' said Melich, 'because Rover accounts for 25 percent of BMW's sales. But BMW will benefit when the pound moves the other way. The company has a natural hedge against changes between the pound (and the mark).'
Volkswagen AG doubled its profit for the third year running to
$757 million, but its return on sales was only 1.2 percent - the lowest of any profitable European carmaker last year.
'There is lots of scope for future gains in profitability at VW,' said
Reitman. 'The company says it is only 25 percent of the way through implementing its platform strategy, and first-half results have been good at the pretax profit level.'
AB Volvo had the best return on sales of any carmaking group last year, 5.6 percent.
Chrysler had the highest return on sales of any major US manufacturer - 4.6 percent, which was just above that of the world's most profitable carmaker, Ford.
Ford raised its net profit 55.6 percent to $6.9 billion and passed General Motors, at $6.5 billion.
The only two Japanese carmakers that did well in the year ending 31 March 1998 were Toyota and Honda. Their combined net profits were $5.4 billion.
The other seven big manufacturers made combined losses of $350 million.
The worst performance of any carmaker last year was from Mitsubishi, which lost $771 million, after making an $88 million profit in 1996. Nissan's loss of $106 million also reversed a 1996 profit. Group results
Figures refer to each company's total operations, including financial services, aerospace, etc. Annual results were taken from company reports. The figures include exceptional items. They are translated into US dollars at current exchange rates. Fiscal years are calendar year 1997 except for Japanese companies that use 31 March 1998.