Fitch does not expect any help from demand-driven growth. European car manufacturers still derive the majority of their sales from their European domestic market, which is mature with low growth prospects. In Germany, a better economic environment should mitigate the effect from an increased value added tax in 2007, but a payback effect from the sales increase posted in 2006 is likely. Moderate growth in France and Italy should also mitigate the sales decline in Spain and the UK. Overall, sales are expected to be flat at best in 2007 across Western Europe (WE), with any potential growth concentrated in the second half of the year.
In this low-growth environment, Fitch views that competition, especially from Asian brands, will be a decisive feature driving the outlook for European groups. As Asian competitors adapt their offering ever more closely to consumer demands, European car manufacturers' ability to respond to their customers and offer exciting products is crucial to resisting the growing penetration of Japanese and Korean brands. Sharp competition will also lead to further pricing pressure as manufacturers fight for market share with incentives and discounts. Furthermore, car manufacturers will have to manage the expanding number of silhouettes and niche models and the shortening product life cycles, which require a greater ability from manufacturers to react to changing consumer preferences and continuous R&D.
Other challenges include high R&D needs to comply with European regulations, especially emission regulations, raw materials price increases and unfavourable foreign exchange rates. The strong euro is a serious hurdle for exporting manufacturers as they increasingly target markets outside of Europe.
Fitch expects European groups to reap the benefit of the measures taken recently both on the revenue and cost sides. The strong focus put on markets outside of WE compensates for limited growth in manufacturers' domestic markets. In particular, while Fitch views that Renault SA's ('BBB+'/Stable) and Peugeot SA's ("PSA", 'A-' (A minus)/'F2'/Negative) market shares will continue to suffer across WE in 2007, this sales decline is likely to be offset by an increasing contribution from non-WE countries. At the same time, new products to be launched in Europe should help limit market share erosion and compensate for the declining sales due to more selective commercial policies. Several European OEMs have decided to cut lower-margin rental fleet and self registrations.
Cost saving measures will be of utmost importance again in 2007. In Fitch's view, cost cutting actions will include further assembly capacity relocation outside of WE, improved economies of scale through technological tie-ups and workforce rationalisation. PSA has recently announced its plan to reduce overheads, rationalise its plants and reduce capital expenditure and R&D. DaimlerChrysler's ('BBB+'/'F2'/Stable) Mercedes car group division has announced similar measures to reduce assets and increase efficiency and flexibility to enhance revenues and margins. Renault's recovery plan calls for a 6% operating margin by 2009 on the back of incremental revenues, thanks to a product offensive starting in 2007 and improved efficiency. Fiat Spa's ('BB-' (BB minus)/'B'/Positive) expects to reach an operating margin between 2.6% and 3.4% for its automotive division by 2007 as it looks to build up on the success of the Grande Punto. Volkswagen Group ('A-' (A minus)/'F2'/Stable) is in the midst of a restructuring plan, which targets a profit before tax ("PBT") of EUR5.1 billion by 2008, i.e. a EUR4bn increase on 2004 PBT.
Although Fitch expects manufacturers to continue collaborating on specific projects and selective partnerships, it does not anticipate major tie-ups like the Renault/Nissan/GM project discussed in 2006. Most manufacturers are expected to continue to strengthen their balance sheets before embarking on major investments that may burden their financial profiles. Similarly, share buybacks are likely to be limited and free cash generation should be directed towards industrial investments and cash savings.
