BRUSSELS - Auto executives expect many benefits from Europe's common currency, but they also worry about a resulting drop in car prices. Meanwhile, suppliers are afraid that carmakers will use the introduction of the euro as a way to enforce new parts price reductions.
Eleven members of the 15-nation European Union will trade in their own currencies for the euro on 1 January. The national currencies won't go out of circulation until 1 January 2002. But on New Year's Day, the 11 countries will be locked into euro exchange rates and will give up the right to set individual monetary policies.
Starting 1 January, transactions can be made in euros, which means that most new vehicles sold in Europe will list prices both in the local currency and in the euro.
Industry executives and analysts say the euro will benefit automakers in several ways:
It will eliminate the risk of doing business in European nations with different currencies, exchange rates and interest rates. Annual savings from no longer having to cover currency fluctuations through hedging could range between DM50 million-DM100 million ($30 million-$60 million), according to DaimlerChrysler.
Purchasing costs will fall as parts prices become more transparent and easier to compare. Suppliers in countries such as Italy, with volatile exchange rates, will be less at risk.
Plant location decisions will be based on demand rather than the need to offset the strength or weakness of a particular currency.
Harmonization of national tax and social policies will be stimulated.
Most of Europe's car companies have embraced the euro. Nearly all will allow customers to pay and suppliers to invoice in either euros or their local currency. Annual reports will give results in national currencies and euros until the end of 2001. They will then convert fully to the euro.
Both DaimlerChrysler and Fiat plan to do their accounting only in euros beginning in January.
Chief executives Juergen Schrempp of DaimlerChrysler and Paolo Cantarella of Fiat Group have been vocal supporters of the change. They say preparations for the euro have already resulted in lower inflation and interest rates.
'Economic and monetary union represents an extraordinary achievement on the road toward closer integration,' Cantarella said. 'The advantages will become evident in the near future.'
But executives and analysts cite some dangers. The main risk is that the euro will cause prices to fall. Pressure from consumer groups and government regulators to harmonize prices throughout Europe is expected to strengthen - even in the six countries that won't join the European economic and monetary union on 1 January.
'In Europe it may take a year to 18 months for prices to harmonize,' said Wolfgang Hartung, who heads DaimlerChrysler's euro project. 'But prices in individual countries will be the same, as in the individual states of the USA.'
Pre-tax prices are expected to rise in some countries and decline in others. Carmakers say that they have long priced lower in high-tax markets like Denmark, Spain and Holland to increase volume and make their vehicles more affordable. Most say they will have to abandon this practice. But prices in Germany and other countries are expected to fall, according to most industry analysts.
Not everyone agrees that prices will decline overall. Stephen Reitman, an analyst at Merrill-Lynch in London, said he believes that prices will harmonize at a medium level.
'A lot of people think that convergence means that prices will fall to the lowest levels,' he said. 'But why should they reduce prices in their domestic markets to equal (relatively low-price) Belgium? Why not raise prices in Belgium instead?'
Thierry Dombreval, Renault vice president for marketing, said the euro will make it easier for the customer to compare prices.
'It will help car prices in the Euroland to converge,' he said. 'But converging prices do not mean identical prices.'
Wolfgang Schneider, director of European affairs at Ford of Europe, said carmakers can raise prices in high-tax markets instead of cut them in countries like Germany and France.
'Prices won't collapse to the lower end,' he said.
Prices to consumers will still vary as a result of different tax structures. The difference in price between an Opel Vectra in the lowest and highest tax countries is DM40,000, said David Hopkins, program director for economic and monetary union at General Motors Europe.
DaimlerChrysler's Hartung predicted that European makers will start advertising and displaying sticker prices before taxes - as is done in the USA. 'That is the only way to compare prices in Europe,' he said. 'You can't make us responsible for the fact that Denmark has a luxury tax on cars.'
In mid-1999, Volvo is expected to be the first automaker to announce uniform Europe-wide prices for its cars in euros. A Volvo would cost the same in every market, before taxes. In January, Dombrevel said Renault price tags will appear both in local currencies and in euros.
Suppliers will say no to cuts
Some suppliers fear that carmakers will use the new currency to enforce price reductions. Suppliers are being asked by many auto companies to quote prices and to invoice in euros starting 1 January, even by carmakers that won't switch their internal accounting to the euro until 2001 or 2002.
Automakers want immediate transparency in supplier prices to more easily compare costs minus safeguards built in for currency fluctuations, according to Hans De Vriese, director of cost management and administration for General Motors Europe's purchasing department.
He said GM expects suppliers to pass on savings that result from not having to operate in a variety of European currencies.
'In the 1995-1996 period, the wide fluctuation in the Italian lira, Spanish peseta and British pound drove costs to tremendous highs and lows,' said De Vriese. He said the euro will end such volatility.
'Suppliers who are competitive will now have more transparent prices that are based more on underlying costs,' he said. 'Quotations will be more comparable, based on their cost structure. That will push prices down,'
Ralf Bergner, chief executive of CLEPA, the European association of auto suppliers, said the euro will benefit suppliers in the long run. 'We will have a very strong tool in the world economy to prove our competitiveness.'
He doesn't expect suppliers to yield to new pressure to lower prices or reveal currency savings. 'If any supplier gains an advantage from the euro, he won't tell you what it is,' Bergner said. 'That is a dangerous thing for a supplier. You better not tell your customer that you have a 2 percent or 3 percent advantage.'