Europe’s carmakers face discounting pain
Europe’s weakening car market is unleashing a wave of competitive discounting that is putting growing pressure on the global industry’s profit margins, carmakers and analysts say.
General Motors and Ford Motor, both of which have big European operations, have warned of the corrosive effects of incentives on their market as industry-wide car sales slow in response to the sovereign debt crisis.
Detroit’s big producers have only recently cut the amount of “cash on the hood” they offer on their cars in the US, which for years contributed to huge financial losses. After restructuring their operations and closing many plants during the financial crisis, America’s carmakers have instilled pricing discipline, and no longer make more vehicles than they can sell.
However, in Europe, where because of political pressure to protect jobs just two car plants closed during the crisis, all mass-market producers still have excess capacity.
“Europe is a very tough market because there is so much restructuring that has not yet been done,” Lewis Booth, Ford Motor’s chief financial officer, told the Financial Times at the North American International Auto Show in Detroit.
Mr Booth said that Ford expected Europe’s car market to contract slightly to a “still relatively good” 14m-15m units in 2012. However, he said: “We can expect to see some pressure on margins as people support that volume by incentive programmes.”
Joel Ewanick, GM’s chief marketing officer, said that competitive discounting was especially strong in Europe because of the prevalence of “national” producers. “We’re trying to instil the same kind of policies (in Europe) as we have here,” he said. “However, in Europe there are home brands, and the home brands do different things in different markets.”
GM, which like Ford has not yet reported fourth-quarter earnings, has acknowledged that it will miss a previous target to break even in Europe in 2011. Ford lost $306m before tax in Europe in the third quarter, but says the unit will report a full-year profit.
JATO Dynamics, the automotive research group, estimates that on Europe’s five biggest car markets an average of one-third of a car’s list price goes from manufacturers back to either dealers or carbuyers in the form of incentives.
“As we move through into 2012, without sign of relief from depressed retail demand, Europe’s car manufacturers show every sign of continuing to fund substantial incentives, just as they have through 2011,” said Gareth Hession, JATO Dynamic’s vice-president for research.
France’s PSA Peugeot Citroën is eliminating 6,000 jobs in Europe and accelerating cost-cutting measures, in part because of the pricing pressure it faces.
Carlos Ghosn, rival producer Renault’s chief executive, said in Detroit this week that he expected European car sales, which fell by about 1 per cent last year, to drop a further 3 per cent in 2012. Renault recently said it would pare back its model range and dealership network in the UK in a bid to restore the operation to profitability.