Citigroup Smith Barney’s John Lawson predicts a tough year for European automakers.
John Lawson, managing director in European automotive research at Citigroup Smith Barney, told the Automotive News Europe Congress that exchange rates will cost European automakers about E2.1 billion in profits this year.
The rise in the cost of raw materials will wipe out another E1.5 million to E2 billion and the combination of decreasing volumes and lower transaction prices will cost carmaker an additional E2.5 billion.
Overall, Lawson predicts these factors will reduce European automakers’ 2005 profits to a little more than E10 billion, down from almost E17 billion in 2004.
Because of the euro’s continued strength against the dollar, some European automakers will sell at a loss in North America if they are not protected by favorable currency hedging contracts.
Lawson said a Porsche Cayenne Turbo sold in the US at $89,300 is 22 percent cheaper than in Europe, where it costs E87,700.
A VW Touareg V-6 is 24 percent cheaper in the US, while a BMW X3 2.5i is 29 percent less expensive.
Lawson estimated that, with a dollar/euro rate of 1.30, Porsche – which he figures has locked in a rate of 1.10 – generates 51 percent of its profit from currency hedging. He thinks hedging represents 28 percent of BMW’s profit, 20 percent of Volkswagen’s and 11 percent of DaimlerChrysler’s.
But he doesn’t think this will last, especially as European carmakers’ favorable hedging contracts expire or begin to cover less of the risk of the weak dollar.
“There is a whole generation of vehicles that have been put into the [North American] market on what turned out to be incorrect hedging assumptions.” Lawson said. “This is a hot button with auto assemblers who will need to address their dollar imbalances before they address building up in eastern Europe.”