With Europe's new car sales set to fall this year to levels not seen since the 1990s, pressure will increase on automakers' revenues and operating margins. Fiat and PSA/Peugeot-Citroen may be the biggest losers in 2013, according to industry observers. Both companies rely heavily on southern European markets where austerity measures introduced by governments will continue to depress consumers' spending power.
Fiat, PSA forecast to be biggest losers as Europe crisis worsens in 2013
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Fiat will also suffer because it will remain largely starved of new products this year after CEO Sergio Marchionne delayed investments in new products to conserve cash during the region's sovereign debt crisis. PSA has been steadily rolling out new products but the company is not reaping the full benefit of a fresh lineup because Europe's ruinous price war means even new cars are often sold with a significant discount.
Fitch warned last month that Fiat and PSA could have their credit ratings cut in 2013. This would lead to higher borrowing costs, putting further pressure on their bottom lines. "Fitch believes that these two companies are the most weakly positioned in Europe and that pressure is building on their current ratings," the ratings agency said.
Fitch cast doubt on PSA's goal of breaking even in 2015 because the automaker will not just suffer in a tough European market but will also be hit by a worse-than-expected slowdown in emerging markets such as China and Latin America.
Fiat's Marchionne is doing the right thing by repositioning the Italian automaker more upscale but he will have a tough time implementing the strategy in the current market, especially when rival automakers are also focused on selling higher value cars to boost profit margins, Fitch said. Another worry is that Fiat cannot count on a bailout from Chrysler because its access to its U.S. unit's cash is limited by a strict ring-fencing.
Fiat and PSA will suffer the most but 2013 will be a bad year for all automakers that sell cars in Europe. Fitch forecasts a 3 percent decline in new vehicle sales in Europe following an 8 percent decrease expected in 2012. This would mean a 23 percent fall since 2007. Other forecasters have similar predictions. Eleven-month sales in the 27 EU countries plus Switzerland, Norway and Iceland were down 7.2 percent to 11.7 million vehicles, the lowest figure since 1993, according to industry association ACEA.
Heading for 8 bn euro loss
Collectively, volume automakers in Europe are likely to report losses of 8 billion euros for 2012, according to Bernstein Research analysts.
Fiat and PSA, along with General Motors and Ford, have said they expect their European operations to return to profit, or at least breakeven, around mid-decade, but they may be too optimistic. A "tough European market" is expected in 2013 and probably also 2014, Ian Robertson, BMW's head of sales and marketing, said in December.
New Volvo CEO Hakan Samuelsson summed up the mood when he told reporters last month that there were "no direct positive signals in the European market." Volkswagen, which has suffered a smaller sales decline in Europe than its rivals, is not gloating. Helped by healthy sales in China and the United States, VW Group is on track to achieve record global sales for 2012. Despite the expected delivery record, VW is "already preparing for a very challenging year in 2013," sales chief Christian Klingler said last month.
Erich Hauser, a London-based analyst at Credit Suisse, said the gap will widen in 2013 between companies such as VW, BMW and Mercedes-Benz, which are keeping their factories busy by exporting to global growth markets, and companies such as PSA and Fiat that rely on domestic sales.
"We see little reason to believe that EU volumes will grow next year, which means that the spread between EU-focused and export-oriented original equipment manufacturers will only continue to widen," Hauser told Bloomberg.
Automakers are caught in a downward spiral. Their vehicle sales are plunging and along with it revenue, so they are forced to cut back on investments. "Automakers are obviously loathe to do this as it threatens the future, but I suspect we will see a bit more of this and therefore the big, big differentiator between automakers in the coming years will be between those who have access to capital and those who do not," said John Leech, head of automotive at KMPG UK.
The financial implications of European austerity measures are likely to be felt for two to three more years, Leech said.
Even if Europe's politicians solve the region's debt crisis, car sales in saturated western Europe markets may never return to the good days of pre-2007.
A shrinking driving age population, fewer young people buying cars and increasing numbers of people in crowded cities choosing not to own a vehicle mean that car ownership has reached its natural ceiling, according to Morgan Stanley. The industry faces a prolonged period of stagnation, much like the situation facing the Japanese industry since 1992, the analysts said in an investors note on Nov. 28.
Luca Ciferri and Douglas A. Bolduc contributed to this report