Europe's carmakers face an anxious second half

European automakers have been buoyed by better-than-expected first-half results as the region's car sales largely held steady despite the phasing out of government incentives, but the good news won't last much longer.

Volume manufacturers selling cars in Europe believe the second half of the year will be difficult due to the ending of incentives and the introduction of tough austerity measures in European countries hit by fiscal crises.

What's worrying companies is that they are not sure how bad it will be.

Credit Suisse's David Arnold said: "The question is how does the second half play out. The implications for the second half and 2011 are what everyone wants to understand."

Credit ratings agency Fitch Ratings pointed out that virtually all carmakers have raised their guidance for the full year, typically from a very low base, after robust results for the first half, but they also confirmed a lack of visibility for their second-half performance.

Volkswagen last week posted a first-half operating profit of 2.8 billion euros, up from 1.2 billion euros a year ago, and revealed it had a cash pile of 17.5 billion euros, but the company warned the strong growth it saw in the first half "would not continue undiminished."

Renault, which posted a first-half profit of 780 million euros compared with a 620 million-euro loss a year earlier, said pricing pressure would likely increase in the second half as the business environment remained uncertain, while raw material price rises would have a negative impact of up to 300 million euros over the rest of the year.

Chief Operating Officer Patrick Pelata said there was "limited ability to predict the fourth quarter thanks to a high level of uncertainty in the region."

Automakers still expect European car sales to fall steeply in 2010 compared with last year, but their forecasts are a little more optimistic than earlier this year.

Fiat CEO Sergio Marchionne predicts a 10 percent drop in Europe's car market in 2010, an improvement on his April forecast of a 15 percent decline. PSA now sees the European market falling 7 percent, compared with a previous forecast of a drop of 9 percent. Renault said it expects a full-year European market contraction of between 7 percent and 9 percent.

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