"Sales of high-end vehicles were less distorted by industry tax incentives in 2009 and premium manufacturers should outperform the overall market in 2010," says Emmanuel Bulle, Senior Director in Fitch's European Corporates group. "Sales of premium vehicles should also benefit from an early recovery of corporate fleet sales, from surging demand for high-end brands in several emerging markets, notably China, and from the broadening offer of smaller vehicles in the premium segment."
Car manufacturers' profitability is particularly driven by revenue growth/decline because of the industry's high fixed cost structure.
Furthermore, structural overcapacity has not been addressed and remains acute in the sector. As a result, the expected sales decline for volume manufacturers, including Renault S.A.('BB'/Negative), Peugeot S.A.('BB+'/Negative/'B') and Fiat S.p.A.'s ('BB+'/Negative/'B') Fiat Group Automobile, in Europe in 2010 should continue to weigh on the companies' profitability and hinder a swift recovery of operating margins. In addition, the recent announcement from iron ore miners that they want steel prices to move from annual contracts to market prices represents another challenge to auto manufacturers already weak profitability and could add substantial volatility to the industry's cost structure.
Despite recent diversification towards emerging regions, European manufacturers' sales are still concentrated in their core European market. Demand in this market, which is mature and offers low growth prospects, was distorted in 2009 by various tax incentives and scrappage schemes. Amongst key European markets, government incentives were discontinued at end-2009 in Italy and Fitch expects sales in the country to start contracting in April as the order backlog of incentive-related sales fades out. Sales in Germany, Europe's largest auto market, declined 4%, 30% and 27% year-on-year in January, February and March 2010 respectively, after tax incentives were stopped in September 2009 and as order books shrank. Incentives in the UK stopped at the end of March and have been reduced in France since 1 January 2010. Fitch expects new vehicle sales to be down 10% year-on-year to approximately 12.2 million units in 2010 in western Europe, after a modest 0.5% growth in 2009 when sales were boosted by tax incentives.
Contrary to the overall market, sales of premium brands including Daimler AG's('BBB+'/Negative/'F2') Mercedes, BMW AG (Not rated) and Volkswagen's Audi, have rebounded in early 2010 in Europe and in the US after a dismal 2009. Industry incentives had offered scant support to sales of high-end vehicles as tax incentives targeted the smallest and most fuel-efficient vehicles, which are relatively less present in premium manufacturers' model ranges. In addition, consumers sought to optimise such incentives by purchasing cheaper and more mainstream cars. While environmental factors may pose a challenge to premium brands with heavier cars and bigger engines, premium manufacturers are responding to this challenge by expanding their model ranges which include smaller vehicles and downsized powertrains with more options, technology and comfort.
