'Gloom will last beyond 2011' for European carmakers

Oct 26 2009 by John Cranage, Birmingham Post

European car manufacturers and their component suppliers are braced for a bumpy road to recovery, which could last until 2011 and beyond.

That was the gloomy prospect highlighted by an authoritative survey by professional services organisation Ernst & Young.

The firm canvassed the views of 300 executives from manufacturers and parts suppliers across Europe in an attempt to understand how the industry will perform and evolve through the recession and into possible recovery.

It found that while nearly 70 per cent of respondents said they expected their business prospects to improve slightly during 2010, nearly one-third predicted the return to sustained sales growth to emerge well into 2011.

Peter Fuss, head of Ernst & Young’s Europe, Middle East, India and Africa automotive practice, said: “Although the industry has already gone through a painful period of unprecedented change, any light at the end of the tunnel for manufacturers and suppliers could be a long way off.

“The automotive industry has been one of the most reported and talked about sectors in the world over the past 12 months and while other sectors maybe showing small signs of growth, the automotive industry appears to have a significantly longer journey towards sustained recovery.”

The survey also revealed that more than 60 per cent of the executives who took part fear that sales of new cars will fall significantly when state subsidies such as the UK’s scrappage scheme end.

The highest percentage of respondents fearing the drop in sales from the removal of scrappage schemes came from France (86 per cent), Germany (74 per cent) and Italy (60 per cent).

“These results could be indicative of the strength of the subsidies offered by these countries, and perhaps reaffirms the criticism by some that the incentives offered have simply brought forward the sales of vehicles into this year,” Mr Fuss said.

Ernst & Young’s snapshot also showed that it is not only the downturn that is reshaping the industry: the changing needs of consumers are also having “a huge impact” on business models and products offerings.

When asked about the emerging opportunities for the new passenger vehicle market, nearly 60 per cent of respondents predicted growth in sales for vehicles worth up to 15,000 euros (£13,636).

In the 30,000-50,000 euros bracket nearly 40 per cent predicted a decline in sales, while in the price bracket of over 50,000 euros (over £45,000) 45 per cent of respondents said sales would fall.

Eric Wallbank, the Birmingham-based automotive markets leader at Ernst & Young said the shift toward smaller, cheaper cars is a major issue for the industry.

“These vehicles are less profitable for suppliers, manufacturers and dealers. Even when sales volumes return, profitability across the industry may not improve.

“This could have a massive impact on the premium brand sector, particularly for manufacturers in countries like Germany and UK.”

Industry executives also highlighted the significance of social and political influences as key to aiding the industry’s road to recovery.

Reduction in fuel consumption and emissions (65 per cent) and investment in new technologies such as electric vehicles (64 per cent) were identified as vital to driving the industry out of the recession.

“The impact of increasing fuel prices, government legislation concerning emissions targets, and tax hikes on higher-emissions vehicles all open a window of opportunity for manufacturers to shape their own destiny and emerge out of the downturn in a strong position,” Mr Wallbank said.

“But to reap the benefits of this opportunity they must be bold and forward thinking and continue to invest in new products and technologies to meet market demands.”

Ernst & Young’s report goes on to stress that change across the sector has been” rapid and dramatic” over the past 18 months and further change is predicted for both original equipment manufacturers and suppliers.

Mr Fuss said: “It is difficult to predict who the winners and losers will be when the dust settles on the industry.

“It is safe to say, however, that success will come to those organisations which, through the downturn, have made their businesses more agile to meet customer demands.”