It was a tale of two halves in terms of auto sales in Europe last year. The first six months of 2009 saw the new auto market struggle under the weight of the worst global economic crisis in decades, with monthly sales significantly underperforming prior year figures. Cumulative new passenger car registrations for January through to June 2009 fell by 11% compared to the first six months of 2008. However, sales picked up significantly in the second half of the year following a raft of government measures to support the sector. By October 2009, 13 EU countries had scrappage schemes in place and these helped boost sales by an average of 15% YoY over the last four months of the year, although sales for 2009 as a whole still underperformed the prior year by around 1.6%.

New Passenger Car Registrations in Europe

Source: ACEA

But while these so-called “cash for clunkers” schemes were an unequivocal success, easing the major automakers through the worst of the crisis, they have also opened up the potential for a sharp correction in auto demand as these schemes unwind in 2010. Indeed, recent developments in the German market, whose scrappage scheme was one of the first to end last September, could be a precursor of what is in store. Although the residual effect of the €2,500 subsidy propped up sales in October and November, in December, auto sales in Germany fell by nearly 5% YoY, significantly underperforming the market average. It therefore seems likely that as scrappage schemes end in other major markets, sales will dip. However, this will be an uneven trend given that some countries have extended their schemes, while others are gradually phasing them out with lower bonuses over the course of 2010.

Although the global economic recovery is now taking hold, it is unlikely that consumer sentiment will be strong enough to take up the subsequent slack in demand. Indeed, the consensus market forecast for sales in Europe in 2010 is hovering around the -5% mark, but estimates vary considerably. For example, both Moody’s and S&P are forecasting around a 9% YoY drop in light vehicle sales in Europe this year. And it is likely to be the high volume manufacturers that suffer the brunt of any pull-back in sales, as it was the makers of smaller models that benefited most from the incentives. As such, sales of the more premium end manufacturers such as BMW, Daimler and Volkswagen should be more insulated from declines in 2010, as will the sales of those manufacturers with substantial emerging market exposure where sales have the potential to grow more rapidly than in Europe.

But it will be a bumpy ride in general for the European auto sector this year. Aside from lower sales, major manufacturers are still struggling with the key issue of overcapacity, having missed a golden opportunity to restructure during the financial crisis. 2010 is therefore likely to be characterised by further cooperations and alliances as major manufacturers attempt to streamline their operations and realise operating efficiencies. Automakers will also have to deal with customers who have become accustomed to discounts, which could put pressure on pricing. Indeed, Renault has already announced a promotion to make up the €300-per-car gap in January and February that has been created by France lowering its scrappage incentive to €700 per car from €1,000 from the start of the year, and also warned of a price war amongst manufacturers as they try to hold onto market share this year. Such developments will negatively impact profitability, which is already under pressure from other factors, such as the need to adopt new models to much stricter environmental regulations. On a more positive note, liquidity should not pose a big problem for the foreseeable future, with most of the major autos having strengthened their liquidity positions in 2009. And pressure on auto credit ratings should also alleviate as the worst of the crisis passes, although many auto names have little financial headroom at current ratings for further declines in credit quality. In terms of credit spreads, the European auto sector still offers a premium over more defensive sectors such as European utilities. However, given the risks ahead for the sector, significant spread tightening seems unlikely.

Nicola Sanders, Credit Analyst

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