European Car Market: How Low Can It Go?

DeclineThe European Automobile Manufacturers’ Association has released September registration numbers for the region — and bad news has gotten worse. New passenger car registrations have declined for the twelfth straight month. September demand was down 10.8 percent compared with 2011, and demand is down 7.6 percent this year to date.

Spain, already struggling with massive unemployment, saw a 36.8 percent downturn in September 2012 compared to September 2011. New car registrations for the same period shrank 25.7 percent in Italy, 17.9 percent in France, and perhaps most troubling, 10.9 percent in Germany. The strength of the German economy — also home to major manufacturers such as BMW and Volkswagen — has been helping support a struggling euro zone.

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Sales for Volkswagen, which had previously been able to capitalize at the expense of its mass-market peers, shrank 13.8 percent in September compared to last year. “The continuing discussion about the debt crisis has also left its mark on Germany, writes industry forecaster R.L. Polk & Co, according to Reuters. Volkswagen is the largest brand in Europe.

French manufacturer Renault suffered a September sales drop of 29 percent, while sales at Italy’s Fiat dropped 19 percent. The ACEA revised its projection for 2012 market contraction from 7 percent to as much as 10 percent. Britain is the only major car market in Europe that saw growth.

American manufacturers have also been taking a beating in the European market. In July, Ford (NYSE:F) forecast that it would lose over $1 billion in the region, doubling a previous estimate. The company’s second-quarter pretax operating losses in the region grew from $149 million in the first quarter to $404 million.

It’s well known that General Motors (NYSE:GM) has lost about $16.8 billion in the European market since 1999. Chevrolet declined 20 percent for September compared to a year ago. The company also operates the Opel and Vauxhall brands, which posted a 16 percent drop for the period. GM has been in talks with French manufacturer Peugeot — now the fourth largest brand in Europe — a relationship that could save the companies a combined $2 billion annually if they can fully capitalize on parts-buying and production synergies.

European car-market woes are the result of a cocktail of problems. Macroeconomic conditions continue to plague a market still recovering from the financial crisis just a few years ago. Labor-friendly laws have made it difficult for companies to close plants and lay off workers, a scenario that is good in some eyes and bad in others. In order to cut costs, manufacturers want to reduce the workforce and close unproductive and unprofitable plants, but have found the process prohibitively difficult.

Meanwhile, Hyundai and Kia have actually managed to post gains in the region, growing 3 to 4 percent last month compared to a year ago. Major Japanese auto makers Toyota (NYSE:TM) and Honda (NYSE:HMC), struggling with ongoing issues in the Chinese market, have also announced that they intend to turn some of their attention to Europe. This increased competition could finally drive struggling car manufacturers out of business, as a post-crisis Europe cannot support the same demand for vehicles that it used to.

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