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Profits will be small and hard-earned in Europe this year

Automakers' first-quarter financial results beat most analyst expectations.

The improvement was not that surprising given that the numbers were measured against a disastrous Q1 of 2009, a time when production simply collapsed because people stopped buying cars and automakers were forced to sell off their massive inventories before making more cars.

What is surprising is how little profit automakers made in Europe during a quarter that is expected to be the best we see this year in terms of unit sales.

The tailwind from scrapping incentives increased first-quarter new-car volumes 9.5 percent to 3.77 million units, according to ACEA, the European automakers association.

But that gain didn't translate into big numbers on many balance sheets.

Ford is the only automaker so far to reveal financial figures for its European business – and the result was quite disappointing.

From January to March, Ford of Europe increased sales 21.3 percent to 416,000 units and revenues 32.8 percent to $7.7 billion (5.8 billion euros).

Its pre-tax result improved to a $107 million profit from a $585 million loss in the first quarter last year.

It is clearly much better to make money than to lose it, but Ford of Europe's results shows how razor-thin margins are in Europe.

By comparison, Ford's North American operations increased unit sales 31.5 percent in the quarter to 547,000 vehicles and generated almost twice the revenues ($14.1 billion) and 12 times more pre-tax profit ($1.25 billion) than Europe.

Fiat Group Automobiles reported an impressive 153 million euro first-quarter operating profit after slipped to a 30 million euro loss in the year-ago period. But CEO Sergio Marchionne warned that European auto operations will lose money this year and in 2011.

Brazil alone will keep FGA marginally profitable for the full year.

Meanwhile, Brazil and China will help keep Volkswagen Group in the black and North America will do the same for Daimler and BMW.

J.D. Power Automotive Forecasting expects European year-on-year new-car sales to go negative this month and remain negative for the rest of the year. To defend themselves against the declining volumes automakers will use incentives, which will further impact their profitability. In Europe, any profits that are earned in 2010 will the small.

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