Analyst Predicts BMW Or Mercedes Will Need To Merge With Someone

Winton: Only the strongest Europeans will survive harsh 2009

SUSSEX, England -- You could argue that Europe's car manufacturers are in good shape compared with America's, but that's not saying much, and 2009 looks dreadful for car sales here, with the possibility that some major players might be taken over or lesser mortals expire completely.

Europe will have to face adversity without any major bailout from their governments, although France plans an inventive scheme to persuade owners of old clunkers to replace them with brand spanking new, fuel-efficient models.

Manufacturers have been gritting their teeth and hoping that the downturn would be over sooner rather than later, with normal service resuming in 2010. But that hope seems to be fading too.

European carmakers have not been slow in coming forward with their begging bowls. Soon after the Big Three began the campaign to persuade Congress to part with $34 billion of U.S. taxpayer's money, the Europeans made it clear that nothing less than $52 billion would be sufficient to safeguard the industry. The European Car Manufacturers Association, known by its French acronym ACEA, said the industry provides direct employment to more than 2.3 million people and supports another 10 million jobs in related sectors.

In the event, European car manufacturers look like they will win about $6.5 billion in loans -- not only much less than the industry had sought -- but spread across all the players, including Ford and GM Europe, Volkswagen, BMW and Mercedes of Germany, Renault and Peugeot-Citroen of France, and Italy's Fiat.

The money comes with strings, not to mention some savage criticism from environmental groups. The funds are part of a $260 billion package agreed by the European Commission to boost Europe's economy, which will be submitted for approval at an E.U. heads of state meeting today and Friday.
Environmentalists oppose loans

Before news that the money to spend on environmental engineering solutions had been approved in principle, the European Federation for Transport and Environment (T&E) voiced its concern.

In an article headed "No loans for car makers while they oppose CO2 legislation", the T&E's Dudley Curtis said the European industry had spent two decades opposing legislation for more fuel efficient cars, and now wanted cheap loans to build them.

"There is surely no deserving case for a taxpayer backed loan from Europe's governments. A loan should not even be on the table for discussion until car makers have dropped all opposition to the car fuel efficiency legislation," Curtis said.

The European Commission has finally agreed on a policy, fought tooth and nail by the manufacturers, on automotive carbon dioxide (CO2) emissions, recommending manufacturers' fleets are capable of about an average 43 miles per U.S. gallon by 2012, with special dispensations for those unable to meet the new standards. This is a 25 percent improvement on today's average fuel consumption, and still hasn't been officially approved.
Wildly optimistic

Auto industry consultancy IHS Global Insight thought more funds might be forthcoming for car companies.

"On top of this $6.5 billion, it is believed that the European Investment Bank is preparing to give another $21 billion to the struggling industry. Even if this is true, however, the combined amount still represents just half of what the region's vehicle manufacturers have asked for, in what was always regarded as a wildly optimistic request," Global Insight's Rebecca Wright said.

Whether or not loan funds are made available, the industry faces a bleak 2009 and beyond.

"Weak GDP growth and the international financial crisis have had, and will continue to have, a significant impact on the European auto industry. In particular, we expect sales in western Europe to decline by between 12 and 15 percent in 2009 and caution that these forecasts may be revised down further in future due to the ongoing deterioration of the economic environment and consumer's reaction to the weakening economy," said Emmanuel Bulle, senior director of ratings agency Fitch.

In 2008, car sales in Western Europe were down about 8.3 percent from 2007 over the first 11 months of the year, and heading for a final figure of 13.58 million, according to automotive forecaster J.D. Power. But sales toward the end of the year were picking up negative momentum, falling 25 percent in November. Sales in Spain dived 50 percent in November, in Britain by 37 percent, and Germany by 18 percent. J.D. Power reckons sales will fall another 11.6 percent in 2009 to 12 million. It had no word on the possibilities for 2010.
French incentives

Sales in France were in better shape than most, "only" down 14 percent in the month. Next year French sales will fall about 5 percent, according to J.D.Power. Renault-Nissan CEO Carlos Ghosn said this is because of French President Nicholas Sarkozy's plan to offer incentives to buyers who replace 10-year-old cars with new ones capable of 35 miles per U.S. gallon.

Fitch Ratings' Bulle has bad vibes about 2010.

"As a result, (of the worsening economy) the agency also considers a sales rebound unlikely in 2010," Paris-based Bulle said.

Carmakers' profits also will suffer because of the need for huge investment to meet the new E.U. CO2 standards, as well as having to provide financial support for ailing dealers and suppliers, Bulle said.

The financing needs of car buyers are also a source of worry, as banks across Europe remain fearful of lending money at anything like the rate which fuelled the long consumer boom.

All this has plunged Fiat CEO Sergio Marchionne into a gloomy mood.

"I have totally revised what I will do in the first part of 2009. We're just going to slam the brakes on, use as many temporary layoffs as needed, cut everything back to essentials. I am going to have one week of production between now and the beginning of January. After that we're in the dark because I have no idea what demand will be. None," Marchionne told Automotive News Europe in an interview.

His overall predictions seemed to exclude a future for Fiat too. Fiat also owns sporty brands Alfa Romeo and Lancia, and supercar manufacturers Ferrari and Maserati.

"You need at least 5.5 million to 6 million cars (a year) to have a chance of making money," Marchionne said.

Fiat's annual output is less than half that.
Draconian measures

"Maybe I'm completely wrong. But today my gut instinct is to be truly Draconian. By the time we finish with this, in the next 24 months, as far as mass-producers are concerned, we're going to end up with one American house, one German of size; one European-Japanese, probably with a significant extension in the U.S; one in Japan; one in China and one other potential European player," he said.

This seems not only to exclude either GM or Ford and Fiat, but Honda and Peugeot too, and would mean either BMW or Mercedes losing their independence. Things are bad, but surely not that bad for the big players. It remains to be seen if the likes of Saab and Volvo of Sweden, subsidiaries of GM and Ford respectively, can hang on. Land Rover Jaguar, cleverly dumped by Ford earlier this year, is also under pressure. VW's Spanish subsidiary SEAT has been losing money.

There are though some, relatively, positive voices out there.

Harald Hendriksen, London-based auto analyst with Merrill Lynch, said car sales will stabilize after falling not much more than 5 percent next year.

Yes, the current quarter is likely to see big losses for all manufacturers. Next year, all save German giant Volkswagen will see profits halved. But think of these good things.
Normally this works

"Commodity prices have fallen from a record high of $2,700 per vehicle to just over $1,500, a saving of $1,200 per vehicle for European manufacturers. The dollar and yen export margin benefit of $6.5 billion further mitigates 2009's revenues," Hendriksen said.

"Central banks are stimulating consumers like never before. Real interest rates are negative. Taxes are being reduced. Governments are embarking on huge spending plans to stimulate GDP growth. This normally stabilizes the market," he said.

Do I detect a note of forced optimism in that last sentence? I wonder if Hendriksen was clenching his teeth and crossing his fingers when he wrote that in a recent report?

Neil Winton, European columnist for Autos Insider, is based in Sussex, England.

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