2006 and 2007 were tough for the European automotive industry and challenges will persist in 2008 as European car manufacturers continue to face difficulties improving market share and enhancing profitability, Moody’s Investors Service said in a new Industry Outlook.
“On a global scale, we expect worldwide demand for cars and trucks to grow at around 3% per annum over the next five years, mainly driven by buoyant demand from emerging countries such as Brazil, Russia, India and China,” said Falk Frey, a Moody’s Senior Vice President and author of the report. “For Western European markets, however, we expect new passenger car registrations in 2008 to remain broadly at the same level as in 2007.”
Overall stagnant demand in major Western European markets represents one of the five factors cited in the report as key to assessing the credit quality of European Original Equipment Manufacturers (OEMs) in the next year. The first factor is overcapacity. In Moody’s view, the balance of capacity reductions in Western Europe, new capacity built up in Eastern Europe and additional demand from those countries remains equal at best; it does not help to solve the problem of overcapacity in
While Western European markets stagnate, developing countries will continue to drive growth for new passenger car registrations throughout 2008 and probably beyond. Demand in these countries and in emerging markets in general is driven by their rapid economic growth, rising income per capita and continued population growth. However, rapid economic expansion leads to extremely volatile sales growth and profit margins are well below those in Western European markets, Moody’s noted.
Exchange rates constitute another challenge. “The continued weakening of the US dollar against the euro is weighing on the profits of OEMs including Daimler, BMW and VW, which generate part of their revenues in the US but do not bear respective costs in the currency,” advised Frey. “Although financial hedging to various degrees smooths the depreciation effects in the profit and loss statements, such a process becomes more and more expensive.”
Furthermore, high prices for oil and raw materials have increased OEMs’ production costs while stricter emission regulations and potentially emission-based taxes and insurance costs could in Moody’s view lead to a sustainable shift in the mix of new vehicle demand, away from large vehicles and SUVs towards smaller and more fuel-efficient vehicles.
Moody’s at present rates six European OEMs: BMW (A1/P-1/Stable), Daimler (A3/P-2/Positive), Fiat (Ba1/NP/Positive), Renault (Baa1/P-2/Stable), Peugeot (Baa1/P-2/Negative) and Volkswagen (A3/P-2/Stable).
