Severe competition threatens European car market

PARIS/FRANKFURT - Reuters

Severe competition among car brands may kill a sense of relief in Europe. REUTERS photo

Europe’s decline in car sales is showing signs of bottoming out, even as the market shrinks for a sixth straight year to a two-decade low. But cut-throat price competition among brands and dealers threatens to kill any sense of relief for automakers struggling with excess plant capacity.

Almost all are bleeding cash in Europe, with the exception of Volkswagen and its German luxury peers. Regional losses last year came to 704 million euros for Fiat and $1.8 billion each for Ford and General Motors, while euro-centric PSA Peugeot Citroen posted a thumping 5 billion euro net loss.

Out of concern for brand image, many carmakers mask their price-slashing by registering some of their own vehicles to sell as used, or by offloading them to rental firms at the end of the month with a hefty mark-down.

Others, like South Korea’s Hyundai, are coming up with ever more imaginative discounts they can brazenly advertise to grab a bigger share of Europe’s shrinking market from weaker rivals.

Many of Hyundai’s recent Spanish customers will be getting 2,250 euros back, after it pledged last month to refund one car loan instalment of up to 150 euros for each of the first 15 goals scored by the national soccer side in the Confederation Cup.

Toyota countered with up to 5,000 euros of extra equipment - such as alloy wheels, parking cameras and refrigerated glove boxes - all for one euro. Its Queen Car dealership in Milan, Italy, has also been giving out holidays.

Optimism is growing that car sales volumes may be nearing the end of their long slide.

Ford is boosting Spanish production of its Kuga SUV by 10 percent, while Volkswagen has asked workers to cut short their summer breaks and build more Golf hatchbacks.

While June registrations fell another 6.1 percent in Western Europe, consulting firm LMC Automotive said, the seasonally adjusted rate rose from an annualised 11.55 million in May to 11.7 million, “comfortably the best result so far this year”.

But any nascent recovery is threatened by very high discounts. “Our concern is that this won’t hold,” said Anil Valsan, lead analyst at Ernst & Young’s global automotive practice.

Cash-burning automakers will have to rein in their discounts sooner or later, triggering another sales decline “within the next few months”, Valsan predicted.

“As long as we have incentives at this level, any bottoming out will be artificial,” he said. “If carmakers don’t start pulling back soon, the correction may be even sharper.”