LONDON – European automakers will carry on an incentives battle despite rising raw material costs, warned analysts.
Manufacturers cannot pass on higher costs for steel and other commodities to consumers because there is intense competition to win new-car sales in the flat European auto market, said speakers at the third annual Automotive News Europe Analysts Roundtable here.
A sales offensive by Asian carmakers also is contributing to the incentives war and preventing carmakers from increasing prices to reflect greater raw material costs, said Nigel Griffiths, director of international automotive industry research at Global Insight in London.
Griffiths said the cost of raw materials used to build a car is 40 percent higher than the five-year average.
Carmakers will continue to give incentives to sell new cars because they “need to keep the metal moving,” said Steve Blackman, head of the automotive practice at Ernst and Young in London. He said incentives will remain until production capacity is cut.
No relief this year
High raw materials costs will not ease until next year, said Philippe Houchois, head of European auto research at J.P. Morgan in London.
Houchois predicted that increases in raw material prices will slow next year when the addition of extra capacity, such as new steel mills, is expected to reduce pressure on prices.
That may be too late for several European carmakers, which are starting now to negotiate new contracts with steel suppliers.
Analysts said another factor affecting carmakers’ profits is the increasing popularity of small cars. Margins are slimmer on small cars than on bigger models.
Said Houchois: “The mix is going down, in favor of B [small] and A [minicar] segment cars.”