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Serial profit-making machines like German luxury car manufacturers BMW and Daimler have acknowledged that the good times are over, but the makers of more mundane vehicles still insist that everything in the garden is lovely.
Daimler was the first to blink and announce a profit warning in its financial statement for the second quarter of 2008, and was quickly followed by BMW. But mass car manufacturers Renault and Peugeot of France, Fiat's Italy and German giant Volkswagen, told their shareholders instead that they could relax and expect earnings to carry on rising.
That doesn't sound credible to analysts.
Financial reports for the second quarter of 2008 were superficially strong, but trading conditions dropped away quickly toward the end of the period. When the big European manufacturers report again in six months time, the results are likely to be more like a train wreck.
BMW and Daimler face unique challenges, as the impact of falling economies, unprecedented high oil prices, diving second car prices, and the credit crunch, force buyers to forsake the top-of-the-range V8 gas guzzlers for lower margin, more modest fuel sippers.
European manufacturers, though, are still amateurs in the red-ink creating process compared with their U.S. cousins. But despite all the obvious current economic and financial threats to the industry, European legislators are about to create an extra hurdle for the industry to jump, in the form of carbon dioxide emission rules. These new rules are expected to be decided by the end of this year, although the likely severity of the financial penalties for transgression is still being negotiated behind closed doors in Brussels.
This is all the more surprising when you consider that European vehicles are already very fuel efficient, an achievement which owes much to the fact that the price of a gallon of gas here is still more than twice the level in the U.S. The E.U. has proposed that European car manufacturers raise fuel economy to an average of about 43 miles per U.S. gallon by 2012, or maybe 2015. European cars achieve an impressive average 35 miles per U.S. gallon now, compared with about 25 mpg in the U.S. Europe's achievement today is the same that Congress has decreed that U.S. cars and trucks must achieve by 2020.
More BMW write-offs expected
Investment banker Morgan Stanley points to the market's negatives.
"Consumers are buying fewer cars. Raw material prices have multiplied. Credit markets have imploded. Used car values are falling. On top of this, the auto industry must re-invent itself -- making the leap from internal combustion to electric propulsion. BMW, VW, Porsche, Renault, Peugeot-Citroen, Fiat and Daimler are all in the same car. It's tough out there, maybe tougher than ever," said Morgan Stanley analyst Adam Jonas.
Meanwhile after the 2008 second quarter, BMW was forced to scale back its profit forecast for the year. Much of the weakness was induced by its performance in the U.S., where the leasing business has come under pressure. Second quarter net profit fell by 33 percent to $786 million from the same period of 2007.
BMW was forced to write off about $700 million in the second quarter after a charge of about $350 million in the first quarter. Morgan Stanley's Jonas believes BMW will have to write off another $1.4 billion by the first quarter of 2009. The company slashed its pre-tax profit forecast for 2008 to at least 4 percent, compared with its previous forecast of at least 6.4 percent.
Daimler's pre-tax profit in the second quarter fell 4 percent to $3.1 billion, compared with the same period last year. While making this announcement, Daimler also cut its forecast for pre-tax profit in 2008 to more than $10.6 billion, compared with the previous forecast of "significantly above" the $11.6 billion it made in 2007.
Mercedes made too many cars
According to German investment banker UniCredit, Daimler's problems centered on the Mercedes subsidiary (it makes trucks and buses too), which faces falling sales in key markets, rising raw material costs and negative foreign exchange effects, mainly in the U.S., which can't be offset by efficiency improvements. And it made too many cars.
"Mercedes significantly overproduced in the first half and clearly has too high inventories. We think that Mercedes will cut production by at least 50,000 units in the rest of 2008," said UniCredit analyst Georg Stuerzer in late July. In early August, Daimler said it would cut output by 45,000 cars by the end of the year.
Stuerzer said he had cut his pre-tax profit estimate for Daimler by 15.1 percent for 2008 and by 20 percent for 2009.
Renault dog didn't bark
The mass car makers, ignoring a rapid deterioration in markets, didn't see the need to slash profit forecasts.
Renault was expected to deliver a profit warning to its investors, but didn't. Investment banks were divided in their view of Renault's prospects, while U.S. ratings agency Standard & Poors had no hesitation in pointing out where it stood, with a cut to Renault's bond status.
Renault had reported a better than expected first half operating profit margin of 4.1 percent, compared with 3.5 percent in the same period last year, and held on to its margin targets of 4.5 percent for 2008 and 2009's 6.0 percent. At the same time it increased its cost cutting and reduced sales targets. Renault conceded that it would be more difficult to attain its profit margin targets.
"The outlook revision reflects increasing uncertainty on Renault's ability to maintain sound cash generation and to avoid a pronounced weakening of its financial ratios," said S&P credit analyst Barbara Castellano.
"(Renault's) guidance lacks credibility," Credit Suisse said. Morgan Stanley's Jonas said Renault's margin targets are now dependent on restructuring.
Renault CEO Carlos Ghosn's "Renault Commitment 2009" included the pledge to become Europe's most profitable car company by 2009, boost annual car sales by 800,000 vehicles and raise profit margins to 6%.
"When the (6 percent) plan was first announced, Renault explicitly stated that it was a plan based on growth and continuous cost improvement, not restructuring, not significant headcount reductions and not write-downs. This appears to have changed. Renault now concedes that restructuring may be required," Jonas said.
VW too good to be sustainable?
Volkswagen, Europe's biggest carmaker, reported strong profits for the second quarter, and reiterated its forecast that it would outperform 2007's record profit.
Operating profit rose 22 percent to $3.2 billion in the second quarter from the same period last year.
In a report headed "Too good to be sustainable", UniCredit wasn't so sure.
"The two obvious questions are: 'What is the reason for this unexpected jump in profitability' and Is this level sustainable?' We doubt that the level of profitability achieved in the second quarter can be sustained in the second half, especially as the regional sales mix is further deteriorating and Volkswagen will incur most of the pre-launch costs for the new Golf VI in the second half year," said UniCredit equity analyst Christian Aust.
Morgan Stanley said VW's earnings quality was deteriorating as the capitalization rate of R&D was increasing, depreciation falling, and capital expenditure rising.
Writing on the wall for Peugeot
Peugeot, which also owns Citroen, surprised investors by raising profits to 3.6 percent in the first half, a 50 percent year on year improvement, and by not announcing a profit warning.
"PSA Peugeot-Citroen reiterated all targets, but we believe that the writing is on the wall; the second half will be tough," said Morgan Stanley's Jonas.
Nobody expected any bad news from Fiat Auto, and they were right.
Fiat Group reported trading profits of $1.7 billion in the second quarter, up 20 percent compared with the same period last year. The company reiterated its targets of trading profit of $5.1 to $5.4 billion in 2008 and between $6.5 billion and $6.8 billion in 2009, compared with 2007's $4.9 billion.
Fiat Auto accounts for about half of the sales of the Fiat Group, which also makes farm machinery and is involved with financial services.
Deutsche Bank said CEO Sergio Marchionne has never missed a target, but 2009's looks extremely challenging.
"Fiat is the only company in the sector which predicts a stable European car market in 2009. Even if Fiat Auto is a small part of the group's valuation, it has always been in the past, a major contributor to earnings variation," Deutsche Bank said.
Fiat and Chrysler
Fiat is believed to be talking to Chrysler about the possibility of using one of its shuttered factories to build its little 500 city car and re-enter the U.S. market.
Forecaster Global Insight doesn't see much cause for optimism for the industry, slashing its sales predictions for 2008 by almost 3 percent to take account of deteriorating conditions.
"Compared with our March 2008 forecast, we have now taken 230,000 units out of our forecast for the full-year 2008, as the economic outlook for the region has clearly worsened, and predict that full-year 2008 volumes will fall by 2.94 percent compared with 2007 to 14.4 million units (for Western Europe)," said a Global Insight report.
"We have also downgraded both 2009 and 2010 by almost 300,000 units in each forecast year. This means that we foresee 2009 total industry volume reaching 14.1 million cars, which would be another 245,000 lower than 2008 and their lowest level in a decade. We then see the market recovering slightly in 2010 to 14.4 million, which would still be the region's lowest since 2003," it said.
Daimler was the first to blink and announce a profit warning in its financial statement for the second quarter of 2008, and was quickly followed by BMW. But mass car manufacturers Renault and Peugeot of France, Fiat's Italy and German giant Volkswagen, told their shareholders instead that they could relax and expect earnings to carry on rising.
That doesn't sound credible to analysts.
Financial reports for the second quarter of 2008 were superficially strong, but trading conditions dropped away quickly toward the end of the period. When the big European manufacturers report again in six months time, the results are likely to be more like a train wreck.
BMW and Daimler face unique challenges, as the impact of falling economies, unprecedented high oil prices, diving second car prices, and the credit crunch, force buyers to forsake the top-of-the-range V8 gas guzzlers for lower margin, more modest fuel sippers.
European manufacturers, though, are still amateurs in the red-ink creating process compared with their U.S. cousins. But despite all the obvious current economic and financial threats to the industry, European legislators are about to create an extra hurdle for the industry to jump, in the form of carbon dioxide emission rules. These new rules are expected to be decided by the end of this year, although the likely severity of the financial penalties for transgression is still being negotiated behind closed doors in Brussels.
This is all the more surprising when you consider that European vehicles are already very fuel efficient, an achievement which owes much to the fact that the price of a gallon of gas here is still more than twice the level in the U.S. The E.U. has proposed that European car manufacturers raise fuel economy to an average of about 43 miles per U.S. gallon by 2012, or maybe 2015. European cars achieve an impressive average 35 miles per U.S. gallon now, compared with about 25 mpg in the U.S. Europe's achievement today is the same that Congress has decreed that U.S. cars and trucks must achieve by 2020.
More BMW write-offs expected
Investment banker Morgan Stanley points to the market's negatives.
"Consumers are buying fewer cars. Raw material prices have multiplied. Credit markets have imploded. Used car values are falling. On top of this, the auto industry must re-invent itself -- making the leap from internal combustion to electric propulsion. BMW, VW, Porsche, Renault, Peugeot-Citroen, Fiat and Daimler are all in the same car. It's tough out there, maybe tougher than ever," said Morgan Stanley analyst Adam Jonas.
Meanwhile after the 2008 second quarter, BMW was forced to scale back its profit forecast for the year. Much of the weakness was induced by its performance in the U.S., where the leasing business has come under pressure. Second quarter net profit fell by 33 percent to $786 million from the same period of 2007.
BMW was forced to write off about $700 million in the second quarter after a charge of about $350 million in the first quarter. Morgan Stanley's Jonas believes BMW will have to write off another $1.4 billion by the first quarter of 2009. The company slashed its pre-tax profit forecast for 2008 to at least 4 percent, compared with its previous forecast of at least 6.4 percent.
Daimler's pre-tax profit in the second quarter fell 4 percent to $3.1 billion, compared with the same period last year. While making this announcement, Daimler also cut its forecast for pre-tax profit in 2008 to more than $10.6 billion, compared with the previous forecast of "significantly above" the $11.6 billion it made in 2007.
Mercedes made too many cars
According to German investment banker UniCredit, Daimler's problems centered on the Mercedes subsidiary (it makes trucks and buses too), which faces falling sales in key markets, rising raw material costs and negative foreign exchange effects, mainly in the U.S., which can't be offset by efficiency improvements. And it made too many cars.
"Mercedes significantly overproduced in the first half and clearly has too high inventories. We think that Mercedes will cut production by at least 50,000 units in the rest of 2008," said UniCredit analyst Georg Stuerzer in late July. In early August, Daimler said it would cut output by 45,000 cars by the end of the year.
Stuerzer said he had cut his pre-tax profit estimate for Daimler by 15.1 percent for 2008 and by 20 percent for 2009.
Renault dog didn't bark
The mass car makers, ignoring a rapid deterioration in markets, didn't see the need to slash profit forecasts.
Renault was expected to deliver a profit warning to its investors, but didn't. Investment banks were divided in their view of Renault's prospects, while U.S. ratings agency Standard & Poors had no hesitation in pointing out where it stood, with a cut to Renault's bond status.
Renault had reported a better than expected first half operating profit margin of 4.1 percent, compared with 3.5 percent in the same period last year, and held on to its margin targets of 4.5 percent for 2008 and 2009's 6.0 percent. At the same time it increased its cost cutting and reduced sales targets. Renault conceded that it would be more difficult to attain its profit margin targets.
"The outlook revision reflects increasing uncertainty on Renault's ability to maintain sound cash generation and to avoid a pronounced weakening of its financial ratios," said S&P credit analyst Barbara Castellano.
"(Renault's) guidance lacks credibility," Credit Suisse said. Morgan Stanley's Jonas said Renault's margin targets are now dependent on restructuring.
Renault CEO Carlos Ghosn's "Renault Commitment 2009" included the pledge to become Europe's most profitable car company by 2009, boost annual car sales by 800,000 vehicles and raise profit margins to 6%.
"When the (6 percent) plan was first announced, Renault explicitly stated that it was a plan based on growth and continuous cost improvement, not restructuring, not significant headcount reductions and not write-downs. This appears to have changed. Renault now concedes that restructuring may be required," Jonas said.
VW too good to be sustainable?
Volkswagen, Europe's biggest carmaker, reported strong profits for the second quarter, and reiterated its forecast that it would outperform 2007's record profit.
Operating profit rose 22 percent to $3.2 billion in the second quarter from the same period last year.
In a report headed "Too good to be sustainable", UniCredit wasn't so sure.
"The two obvious questions are: 'What is the reason for this unexpected jump in profitability' and Is this level sustainable?' We doubt that the level of profitability achieved in the second quarter can be sustained in the second half, especially as the regional sales mix is further deteriorating and Volkswagen will incur most of the pre-launch costs for the new Golf VI in the second half year," said UniCredit equity analyst Christian Aust.
Morgan Stanley said VW's earnings quality was deteriorating as the capitalization rate of R&D was increasing, depreciation falling, and capital expenditure rising.
Writing on the wall for Peugeot
Peugeot, which also owns Citroen, surprised investors by raising profits to 3.6 percent in the first half, a 50 percent year on year improvement, and by not announcing a profit warning.
"PSA Peugeot-Citroen reiterated all targets, but we believe that the writing is on the wall; the second half will be tough," said Morgan Stanley's Jonas.
Nobody expected any bad news from Fiat Auto, and they were right.
Fiat Group reported trading profits of $1.7 billion in the second quarter, up 20 percent compared with the same period last year. The company reiterated its targets of trading profit of $5.1 to $5.4 billion in 2008 and between $6.5 billion and $6.8 billion in 2009, compared with 2007's $4.9 billion.
Fiat Auto accounts for about half of the sales of the Fiat Group, which also makes farm machinery and is involved with financial services.
Deutsche Bank said CEO Sergio Marchionne has never missed a target, but 2009's looks extremely challenging.
"Fiat is the only company in the sector which predicts a stable European car market in 2009. Even if Fiat Auto is a small part of the group's valuation, it has always been in the past, a major contributor to earnings variation," Deutsche Bank said.
Fiat and Chrysler
Fiat is believed to be talking to Chrysler about the possibility of using one of its shuttered factories to build its little 500 city car and re-enter the U.S. market.
Forecaster Global Insight doesn't see much cause for optimism for the industry, slashing its sales predictions for 2008 by almost 3 percent to take account of deteriorating conditions.
"Compared with our March 2008 forecast, we have now taken 230,000 units out of our forecast for the full-year 2008, as the economic outlook for the region has clearly worsened, and predict that full-year 2008 volumes will fall by 2.94 percent compared with 2007 to 14.4 million units (for Western Europe)," said a Global Insight report.
"We have also downgraded both 2009 and 2010 by almost 300,000 units in each forecast year. This means that we foresee 2009 total industry volume reaching 14.1 million cars, which would be another 245,000 lower than 2008 and their lowest level in a decade. We then see the market recovering slightly in 2010 to 14.4 million, which would still be the region's lowest since 2003," it said.
