Price war in Europe raises tensions, hurts profits
 | Ford of Europe's Roelant de Waard: "It is a very aggressive environment, and until either demand picks up or capacity is adjusted to the situation, it’s unlikely to change." |
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PARIS -- Tensions are rising among car manufacturers in Europe as they blame each other for a profit-killing price war.
With European car sales likely to slip to their lowest level since 1995 as austerity measures reduce consumers' buying power, volume brands are offering average discounts of 20 percent on new cars in key European markets.
The price war in Europe is "quite serious and possibly becoming worse because of some desperate moves of people who have cash issues," Renault COO Carlos Tavares told Automotive News Europe.
Susan Docherty, head of Chevrolet in Europe, said Fiat and PSA Peugeot Citroen are producing "very scary numbers" with discounts of as much as 30 percent off gross retail prices. "Nobody can make money in Europe when you've got incentives at that level."
Erich Hauser, an analyst at Credit Suisse in London, agrees. "The biggest problem for the industry is the complete meltdown of pricing discipline," he said.
Net prices tumble
That meltdown has led to declining net prices -- what automakers make from vehicle sales -- which is hitting profits. Fiat Group's brands are on track to lose 700 million euros ($907 million) in Europe this year compared with a $648 million loss in the region last year. Ford of Europe's pretax operating loss grew to $404 million in the second quarter compared with a profit of $176 million a year earlier. Ford now expects to lose more than $1 billion in Europe, nearly double its earlier forecast.
European Union car sales fell 11 percent to less than 1.1 million in September, which was the largest year-on-year contraction in the past 12 months, according to the European automaker association ACEA.
Barclays Capital Equity Research data show that auto pricing in Europe was flat in September. Discounts in the mass-market segment continue to hover around 20 percent, while in the premium segment the figure is closer to 12 percent.
"A tight rein on inventories means carmakers do not have to throw more cash at customers -- yet," Barclays noted.
Intense discounting
The company's research shows that discounts on volume brands in Germany rose to 24 percent in June and July before dropping to 20 percent in August and September. In France, average discounts climbed to 20 percent in September from 19 percent in August and 18 percent in July.
Another tactic used to boost sales is self-registrations. That's when a retailer registers a new vehicle as sold to the dealership then offers a big discount on a model that is considered a used car.
Ford of Europe sales chief Roelant de Waard said his company is trying to limit its participation in self-registrations to protect profit margins, but "you have to live with the realities of the industry."
He said: "If you don't participate in something that is a phenomenon, that would make you uncompetitive. It is a very aggressive environment, and until either demand picks up or capacity is adjusted to the situation, it's unlikely to change."
Fewer sales
Ford estimates that self-registrations accounted for 30 percent of total German car sales in the first eight months of 2012.
General Motors' Opel/Vauxhall unit expects to sell 200,000 fewer vehicles this year, ahead of an even tougher market in 2013. Alfred Rieck, Opel's sales chief, said: "I can tell you, though, that we will not be chasing the market by buying sales through the increased use of incentives."
Despite Rieck's statement, Barclays' research shows that Opel/Vauxhall offered the highest average discounts in Germany and the United Kingdom last month and was the No. 2 discounter in France after Renault.
Dave Guilford, Bloomberg and Reuters contributed to this report
You can reach Luca Ciferri at lciferri@crain.com.
