You never meet a shy and retiring car salesman. They are always bursting with confidence, about to sell you a tremendous deal. So we have to expect that the companies are always going to be confident about the future – even when it looks unpromising to everyone else. 2008 is close enough, that we can all remember GM and Chrysler claiming everything was fine, almost until they had to be rescued by the US government.
Similarly today, we have to make our own judgements about the underlying health of the European auto market:
- Fiat Chrysler’s sales were up 14% in 2015 in Europe, but it made hardly any profit there
- Ford surprised itself by making a small profit in Europe in 2015, but only after losing money since 2011
- Ford and GM together have lost $4.6bn in Europe since 2012
VW, of course, is under threat as the emissions scandal continues to grow. Europe’s market leader has been a major beneficiary of the cosy collaboration between regulators, governments and companies. Now the European Commission is proposing that tests be carried out by independent assessors – rather than by laboratories paid by the companies. And it wants the power to do spot checks on the roadside.
Plus there is the ever-growing threat from new business models, as we discuss in the new 5 Critical Questions Study. Car-sharing models such as Uber and BlaBlaCar, as well as those initiated by companies such as Mercedes and BMW, could well reduce car sales very substantially over time.
Even more certain is that the overall market is in decline due to demographic factors. Older people drive very much less that when they were younger, and today’s younger people no longer share their parents’ “love affair with the car”. They worry about the environmental impact of auto pollution, and they can now communicate with friends via social media – so they have less need to drive anywhere.
But this doesn’t mean that manufacturers and suppliers to the industry should simply give up. Instead, they need to develop new business models to replace those that are no longer working. The chart illustrates one successful route taken by French company, Renault:
- It launched the low-cost, no-frills Dacia range in 2004, and it is now the fastest growing brand in Europe
- Sales reached 382k in 2015, up 3-fold since 2008, whilst the overall European market fell 10%
The secret of their success is keeping it simple, as the company’s website says:
“We’re Dacia. We make cars. Cars that favour function over frivolity. We’ve made an enemy of the unnecessary. Because we believe you should only pay for what you need.
“We make a simple range of cleverly designed, quality vehicles. Our prices are clear and straightforward, whether you buy online or at our nationwide retailers. Our range starts at only £5,995 (€7900, $8600).
“Maybe that’s why we’re the fastest growing car brand in Europe and have been since 2004.”
They are the low-cost model of the auto industry, and its most successful brand. Their customers just want functionality and the cheapest possible price, which means suppliers have to adjust their business models to compete successfully. But any company able and willing to supply essential components to Dacia, without frills and special features, is assured of a growing market.
Dacia, like Ryanair and EasyJet in the airline business, and Aldi and Lidl in retail markets, are growing and profitable. Its success with the low-cost business model highlights an important opportunity for others in Europe’s auto industry.
Greek auto sales have been racing ahead in recent weeks. They are up 16% so far this year, as people seek ways to protect their money in the event of Greece leaving the euro. April saw the strongest rise, with sales up an astonishing 47% versus 2014. As The Telegraph noted:
“People living in a country gripped by financial turmoil often worry about the security of their money. If it’s in a bank, it can be caught up in capital controls or lost through insolvency. Better, then, to spend it. And the purchase of choice is often a car.”
Ironically, the main winners from this are German car makers, as Greeks buy more German cars than any other brand.
Across the reset of the continent, the picture is more mixed. As ACEA comment:
- France (‐3.5%) and Germany (‐6.7%) faced a downturn, whilst Spain (+14.0%), Italy (+10.8%) and the UK (+2.4%) saw positive growth
- But demand was largely supported by the EU’s new members, especially Poland (+11.0%) and the Czech Republic (+17.6%)
In terms of the top 5 major manufacturers, only Renault showed an increase over the month, up 5%. And this was despite increased discounts by majors such as Ford (14%) and Fiat (16%) in key markets such as Germany.
Overall growth is also slowing, as the chart above confirms. Sales so far in 2015 are up 6.8%, but May was only up 1.3%. And the market continues to highlight the change underway in consumer preferences. Thus the biggest gainer has been sales of the Mercedes Smart car. Designed for cities, its sales were up 84% in May, and 56% so far this year after an updated 2-seater version, and a new 4-seater model went on the market.
Meanwhile, my own London borough has joined Paris’ fight against diesel engines, charging a £96 ($150) premium for its street parking permit. And an even bigger campaign is about to get underway, as London seeks to boost electric vehicles and car-sharing across the city:
- The city plans to spend £100m to boost the use of electric vehicles and car sharing across the capital
- The model is Paris,where 220k drivers now use its Autolib scheme – taking 31k private cars off the road
- Cost, and the need to reduce air pollution are the key drivers
This is a big win for French company Bollore, which has pioneered this experiment in Paris and has now won the London contract. It highlights how markets are moving towards a more service-led mentality, and away from a simple product focus. As Bollore note:
”Lots of people aged 18 to 25 are using the cars to go out for the evening with their friends. They might use them to go to a nightclub, dinner or the theatre…. We expect London to be bigger than Paris. It won’t be quite the same as Paris as English people are different but we have four years’ experience in Paris and that will help us.”
Their success highlights the opportunities now being created as we move slowly but steadily into the New Normal.
Companies and investors who seize these opportunities will do very well – unfortunately, at the expense of those who cling to the supply-driven and product-based strategies of the past.
A mild winter, combined with 20% price discounts, has kept EU auto sales in growth mode. Latest data from ACEA shows January sales at 999k were the best for the month since 2011′s 1.042m. The chart above shows the 12-month trend line since 2005, to avoid seasonal fluctuations with the monthly data (blue line):
- Sales were stable through to 2008 at around 12m, and recovered temporarily after 2009 due to government stimulus
- But they then began a steady decline to below 10m until the end of 2013
- Over the past year, however, manufacturers have made increasing use of discounts, which now average 20%, to support sales
- Governments such as Spain’s have also introduced €2k subsidies ($2.3k), helping to push Spanish sales up 28% in January
At the same time, the industry is continuing its move into the New Normal, with 2 key issues now impacting the market:
The first is the continuing shift by private individuals towards low-cost cars, such as Renault’s Dacia. Its basic model sells for around €7k, and saw its sales rise 23% in 2014 after a similar increase in 2013.
This parallels the second trend, which is the continuing decline in the number of private individuals buying cars. As Peter Fuss at EY has noted: “Not since the year 2000 have so few cars been bought by private individuals.”
The second chart highlights two critical drivers for this move into the New Normal:
- Europe’s ageing populations are driving less. Once people move into their 50s and 60s, they stop being a taxi service for their children and they also stop driving to work once they retire
- Young adults are driving less. As BMW’s ‘Institute for Future Mobility’ described at our November conference, young people in the West no longer see taking a driving test as a ‘rite of passage’. They also often prefer to use social media or public transport for both cost and environmental reasons
As a result, broader trends are starting to develop that will further reduce the attractions of owning a car. One is the growth of car-sharing applications such as Uber. Another is the discussion underway in Paris, France, about banning older vehicles from the city centre.
This follows a call from the Mayor of Paris for all diesel cars to be banned by 2020. And polls suggest a majority of Parisians support a diesel ban.
One simple reason is that car-owners are now becoming the minority in many major European cities. As the Mayor notes, “Today 60% of Parisians already do not have cars, compared with 40% in 2001. Things are changing quickly“.
Low growth and low-cost have become the dominant features of Europe’s auto market.
Europe’s modest rise in auto sales continued in June, with volumes up 4.5% versus 2013. But as the auto association reminds us, this “is the second lowest level in the month of June since reporting began in 2003“. And the detail of the sales increase is not encouraging for the future:
- HI sales are up 6.5% at 6.6m (red square) versus H1 2013 (green line)
- But overall, European sales are down 5m from their peak, with France down 11%, and Spain and Italy down 47%.
- Only Germany and the UK are selling the same volume as in 2007, and both are up less than 1%
- The German market has been supported by heavy discounting averaging €2700 ($2600) per car
- The UK market has been supported by bank mis-selling compensation payments of £15.5bn ($26bn)
- Average payments of £3k – £5k have often been used as down-payments for new cars
- Other major markets such as Spain have also depended for current sales rises on the re-introduction of incentives
And as the Financial Times reports, the champagne is definitely not flowing at Europe’s carmakers. Opel’s CEO warns:
“The market in Europe is not really growing. The year started off pretty bullish. We are all a bit more cautious now. There are areas with growth, but it is certainly worse than we thought at the start of the year.”
In turn, operating rates are close to 70%, with nearly a third of European capacity sitting idle. GM subsidiary Opel lost $2.75bn in 2012-13, and Peugeot lost €7.3bn, whilst even Ford lost $1.6bn in 2013.
Companies are now starting to take action to restore profits. Opel are closing their Bochum factory, and others are likely to follow. These will create job losses in supplier factories as well, reinforcing the cycle of decline.
In addition, heads are starting to roll at the top of the major companies. Volkswagen’s head of production and its head of global marketing have left in the last 2 weeks.
At the same time, companies are starting to wake up to the fact that the market itself has changed, probably forever:
- In 2008, at the end of the SuperCycle, GM had 10.4% of the market versus just 4.9% for the low-cost brands
- Today, Dacia, Hyundai and Kia have 9.1% versus just 7.9% for GM
GM, like most companies, have been incredibly slow to recognise the arrival of the New Normal. Now, they are finally starting to catch up. But they are a long way behind the leaders. As Opel’s CEO admits,
“Dacia is a great thing. GM is definitely not Dacia, but this whole budget and entry-level market segment is very interesting. They can be admired. We are definitely looking at the segment.”
This confirms the blog’s long-held view that suppliers to the European industry need to radically review their portfolio. ‘Design to cost’ is the key parameter. The successful business models of the past are now irrelevant for cash-strapped consumers.
The European auto market continues at 20-year lows, with sales down 4% in January – September. Whilst September’s sales appeared stronger, up 5% versus 2012, this was only due to Spain and the UK. Spain boosted volume by 10k due to a €2.7k ($3.7k) government hand-out for people trading in an older vehicle. Whilst UK volumes were up 40k due to a credit boom in car leasing.
The chart above highlights the key issue, that the profitable ‘middle ground’ has now disappeared.
For 25 years, auto manufacturers competed on the basis of adding features such as air conditioning, air bags, central locking, navigational aids etc. This added enormous value, without greatly increasing costs.
But now, all the major manufacturers are steadily losing volume and seeing profits disappear:
- Their volumes were all lower January – September, whilst margins were under pressure due to discounting
- Only 2 brands are showing growth, due to companies taking a different approach
- Renault’s Dacia range has seen volume jump 21% to 211k sales
- Tata’s Jaguar has seen volume rise 17% to 21k
Dacia is focused on the low-cost end of the market, with selling prices starting at €7k. It also manufactures on a ‘design to cost’ basis, allowing it to achieve EBIT margins of 6% – twice those of Renault’s other models. Jaguar is focused on the niche high-end, where it is providing high perceived value for customers.
These trends are now beginning to accelerate. Europeans, like Americans, have been driving fewer miles/year since the mid-2000s. The BabyBoomers who led the demand surge in the SuperCycle are now retiring, so their work-related mileage is reducing. In addition, as Leigh Gallagher shows in her excellent book ‘The End of the Suburbs’, Boomers are increasingly moving back to the cities to be close to friends, family and health/support facilities.
At the same time, as the blog noted earlier this year, BMW research shows car ownership in the critical 20-39 age group has reduced in most of the 12 countries it studied. High levels of youth unemployment, plus the high cost of insurance, are part of the cause. But the glamour of car ownership now seems to be disappearing, whilst online services such as Facebook are providing a low-cost way of keeping in touch.
This highlights a key issue for companies’ future planning. In the past, it was assumed that demand for cars would always increase. But now it is becoming clear this judgement confused demand for mobility with demand for cars.
Similar mistakes have been made in the past, of course. Older blog readers may remember using slide rules in the classroom and the workplace. But this universal tool has now disappeared, as it turns out the market was for calculation instead.
Markets in the future will thus look very different from those of the past, as we discuss in Boom, Gloom and the New Normal. Companies who adapt to these new developments will likely do very well indeed. But companies who fail to change may find life very difficult indeed.
Greece’s debt default saga seems never-ending. And it is tempting to hope that it only matters to those suffering in Greece and the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain).
But a look at auto sales trends since 2005 gives a different picture. As the chart shows, based on ACEA data, sales in the 5 PIIGS countries have seen a sharp decline since the crisis began:
• 4.8m autos were sold there in 2007, 31% of total EU sales (blue column)
• Only 2.9m were sold in 2011, a fall of 39%
• Italy’s sales (green line) were down 30% to 1.7m
• Spain’s (red) were down 50% to 0.8m
• Portugal’s (orange) were down 24% to 0.2m
• Greece’s (purple) were down 65% to 0.1m
• Ireland’s (brown) were down 52% to 0.1m
It is also clear that further declines are inevitable, as earlier stimulus such as ‘cash for clunkers’ is replaced by austerity programmes. Those losing their jobs in the public sector, or seeing their pensions reduced, will suffer a permanent loss of purchasing power.
Even more worrying is that a vicious circle is now underway. Jobs are starting to go in the private sector within the PIIGS, and amongst EU companies who supply there, further damaging the sales outlook:
• Italian auto maker, Fiat, sold 928k cars in 2011, versus 1.2m in 2007
• France’s PSA, the EU’s 2nd largest manufacturer, sold 1.6m versus 1.9m
• Renault COO, Carlos Tavares, has suggested current price wars could lead to a major bankruptcy
• He added “you cannot continuously be in the red. Somebody some day has to pay for it.”
Already PSA has announced 6000 job cuts, and said that production needs to be cut short-term to conserve cash-flow. Whilst
Fiat CEO Sergio Marchionne has warned that Europe needs to “cut 10% – 20% of its car manufacturing capacity”.