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Small is beautiful at Paris

2008-09-29 09:25

Marcel Michelson and Helen Massy-Beresford

Carmakers will make fuel efficiency a sales mantra at the Paris Motor Show when they tout new models to customers whose numbers and budgets have shrunk in the face of financial turmoil and high oil prices.

Tighter finances and new emissions rules look set to favour the sale of smaller models and engines, while the industry's revenue base may also be impacted by slowing growth in emerging markets, until recently a welcome outlet for European carmakers faced with a decline in maturer markets.

Europe's mass car makers, Volkswagen, PSA Peugeot Citroen, Renault and Fiat  have all been forced to review their production plans and if the economic situation worsens there is a risk that the problems of the US car sector may spill over to them too.

Citigroup last week cut its forecasts for 2008 and 2009, predicting 2008 will be the first year of volume declines in the global car market since 2001, with a drop of 1.1 percent.

"There's clearly a lot of nervousness about the 2009 numbers," said Citigroup analyst John Lawson.
"I don't think there's a widespread feeling that 2010 will be worse," he said, adding: "At this point the horizon doesn't stretch out that far, but most economic scenarios suggest the beginnings of a recovery in 2010."

The DJ Stoxx Auto index has shed 22 percent this year and some shares, including Renault's, have fallen 50 percent.

On the market for credit default swaps, Peugeot and Renault have relatively high prices, 190.2 and 197.85, compared to the 112.5 5-year Itraxx index and BMW's 115.03.

Megane versus Golf

At the Paris show, which opens to the media on October 2 and the public from October 4 to October 19, Renault will launch the new version of its top-selling Megane model and Volkswagen the new Golf, which is its best-selling platform. The world's biggest carmaker, Toyota will present a new, larger Avensis, and at PSA all eyes will be on the 3008 small MPV.

Toyota will also launch a small urban SUV, the Urban Cruiser, and the iQ which it calls the world's smallest four-seater car. But the French weekly Auro-Journal scoffed after a test: "It sure is small, but a four-seater?"

Citroen has the C3 Picasso, a small multi-purpose vehicle, while the Ford Ka II, Hyundai i20 and Kia Soul are also small cars.

Though the holy grail of the full electric vehicle remains several years away, manufacturers are likely to focus on the growing offering of petrol and diesel hybrid or concept cars.

They may also start to temper market expectations for the full year when they present third quarter sales and volumes later in October, Lawson said.

Renault has already said it expects sales of 3 million instead of its original 2008 target of 3.3 million, while Michelin has cut its operating margin target to approaching the first-half level of 8.6 percent instead of stable versus 2007's level of 9.8 percent.

"There is a feeling that the auto industry is one that could show very material changes in landscape," Lawson said.

Earlier this month, data showed demand for new cars in Europe fell sharply in July and August, darkening the outlook for carmakers banking on higher sales to meet profitability targets despite spikes in raw material costs.

New car registrations fell by 7.3 percent in July and 15.6 percent in August compared with a year ago because of a general deterioration in consumer confidence and the effect of continuing high fuel prices.
Over the first eight months of the year, new car registrations in Europe fell by 3.9 percent.
In Brazil, carmakers expect sales to slow in the second half after a spike in July. In Russia, August sales of imported cars were up 23 percent but that compares with the 40 percent of July. China's car sales fell 6.34 percent in August.

Luxury loses sparkle

Luxury and sports car groups such as BMW, Mercedes and Porsche are generally less impacted by a general market downturn and have bigger margins that give it some pricing leeway.

But a shake-out of jobs in investment banking and a drop in 2008 banking bonuses may also hurt their sales.

"Easy credit has made luxury cars available to a much wider audience. The tightening up of credit could hurt them more than most," said Nomura International analyst Michael Tyndall.

But it is not all doom and gloom.

"Europeans will continue to drive cars. The fuel efficiency of those cars will change, in part because of high oil prices, and because regional governments are almost universally increasing CO2 taxes," Tyndall said.

Technological developments allow for greater fuel savings in the coming years compared with current models, so the impetus for drivers to buy new cars will increase.

"Manufacturers with a lead in fuel efficiency will benefit. Whether they can translate that into an improvement in profits is the question," he added.

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