February 27, 2014 at 11:55 am

Neil Winton: European Perspective

Europe pulls out of slump with lame recovery, as China worries mount

The Huracan is a candidate for car of the show in Geneva. (Lamborghini)

Geneva, Switzerland — The European automotive industry has finally pulled out of its six-year free-fall, but prospects for a U.S.-style sales surge look thin, and industry leaders gathering here for the annual Geneva car show will be looking nervously east and bracing themselves for a possible bursting of the China bubble.

Loss-making mass car manufacturer Peugeot-Citroen of France has warded off disaster thanks to a humiliating deal which ceded control to the French government and Dongfeng of China in return for a €3 billion ($4.1 billion) bail-out. Fiat’s merger with profitable Chrysler has shored up its red-ink ravaged European operation for the time being, while Ford Europe and General Motors Europe have also taken steps to slow losses. Only Renault of France among the non-German mass car makers has made money, thanks to burgeoning sales of its third-world cut-price Dacia brand.

German manufacturers like European market leader Volkswagen, its upmarket subsidiary Audi and Porsche, and luxury sector leaders BMW and Mercedes are making impressive profits, not least because of their big success in China. But a recent documentary from China by the BBC suggested economic growth there resembles a dangerous “bubble” which might burst some time soon. That would create havoc for the Germans, and just about everybody else too.

One exciting bright-spot on the horizon for the industry is the emergence of cars which drive themselves, which promise a renaissance by cutting accidents and insurance costs, increasing the utility of cars and roads, liberating the elderly and reigniting the young’s enthusiasm.

BMW front-wheel drive

This won’t start to happen until 2020 at the earliest so don’t expect any road-ready revolutionary new cars at this year’s Geneva show, which are mainly developments on long-standing themes. BMW will be showing its first front-wheel drive car, the 2-series minivan. Renault’s new little Twingo, developed jointly with Mercedes to replace its Smart city-car will unusually for a small car have rear-wheel drive. The joint venture between Peugeot-Citroen of France and Japan’s Toyota will unveil new versions of its city cars in the form of the Peugeot 108, Citroen C1, and Toyota Aygo. There will be assorted new supercars from McLaren, Lamborghini and Ferrari. Audi will show off its new A3 plug-in hybrid, and its redesigned TT sports car. Pricey electric cars that don’t go very far and nobody can afford to buy will have a ubiquitous but token presence.

West Europe’s recovery from recession-induced slumping sales was marked by the usual over-the-top euphoria from the industry, but the future looks uncertain to say the least, according to Professor Stefan Bratzel of the Center of Automotive Management in Bergisch Gladbach, Germany.

Fragile

“We see a slight increase of the market in 2014, but only a slow upward trend, perhaps a two percent increase for Western Europe from 11.5 million to 11.8 million (car sales). There definitely won’t be a U.S.-style acceleration. Everything is very fragile at the moment. We’re hoping for a slow upward trend, but we need to wait a few months to see if it stabilizes,” Bratzel said.

Developments in China were worrying.

“It’s quite clear that the Chinese market won’t be a linear development. In the future there will be some stagnation, maybe a decline. There also could be in the next five years a bursting of the bubble. It could happen, but you can’t really predict when. Manufacturers will be looking to the Chinese government on how to manage that, because it is a big threat to them too,” Bratzel said.

Bratzel said the development of competing new automotive engine technology still doesn’t point to a hands-down winner as manufacturers race to meet ever more demanding fuel efficiency rules, but hybrids have the inside track over battery-only cars.

“It’s interesting that we don’t have one alternative technology which will dominate the market. I think hybrids will be the stronger, especially plug-in hybrids like the new Audi A3. I think hybrids will win a greater share of global car sales (compared with battery only vehicles). That will take some time and means improving fuel efficiency of conventional power trains is very important still,” Bratzel said.

Hybrids like the Toyota Prius combine gasoline engines and battery power, and have very small battery-only range. Plug-in hybrids have much longer — up to 40 miles — of battery-only range, and can be recharged at home. Extended range electric vehicles like the Chevrolet Volts and BMW i3 have auxiliary engines to top up the battery when it expires. And then there are battery-only cars like the Nissan Leaf.

Overcapacity

Peter Fuss, partner at consultants Ernst & Young’s Global Automotive Center in Frankfurt, Germany, said Europe will need time for its sales to return to pre-crisis levels, and the long-term problem of overcapacity remains. In Geneva, new cars will show more weight reduction, inspired by fuel economy rules, and new niche models like small SUVs. Fuss also shares in the excitement about computer-driven, or autonomous cars.

“Autonomous driving is key for the survival of the car as part of integrated mobility concepts. Autonomous driving provides more comfort and more safety. In an ideal world, autonomous driving reduces traffic accidents and deaths on the street to zero, plus no traffic jams any longer. (The industry) and other players are investing a lot in this technology, which may be even more important than EV (electric vehicle) technology,” Fuss said.

John Wormald, analyst with British automotive consultancy Autopolis, agrees that Europe faces a stagnant future, with sales bumping along the bottom.

“There’s so much economic uncertainty and consumers lack confidence. And I keep on having that feeling that attitudes are changing and people are less likely to spend a lot of money on new cars,” Wormald said.

No take-off for electric cars

“This continued push to try and promote new drive lines like hybrid, and plug-in electric will be themes in Geneva. The manufacturers continue to push battery electric vehicles. I see very little chance of them taking off, and everybody blames the lack of infrastructure and charging points. I’m not sure that’s the whole story and they refuse to sell, even though almost nobody drives more than 100 kilometers (62 miles) in a day. But what happens when you want to go further?” Wormald said.

And Europe’s perennial problems still fester.

“The European market is horribly overcrowded with too much production and too many players. Every time someone gets into trouble they get bailed out (by governments). Somebody ought to go; everybody’s losing money but the Germans. There needs to be a shakeout but it never happens,” Wormald said.

He also worries about China.

“If something goes wrong in China it really will hurt. If the bubble bursts and all the off-balance sheet bank debt comes into play — like the sub-prime crisis in the U.S. — and the Chinese stop buying cars just about everybody will get hit very badly, the premium Germans particularly. It will be very difficult for the government in China. They’ve got the authority, and maybe they will be able handle it better than we did in the West,” said Wormald.

Exuberance

But the prospect of big sales of self-driving cars unites everybody with a rare feeling of exuberance for the future.

“Autonomous cars are one of the most interesting prospects,” said Professor Bratzel.

“This is a very big long term trend and all the car manufacturers are working hard on this,” Bratzel said.

Computer driven cars have terrific potential, but there is clearly also great scope for disaster if anything goes wrong. The thought, for instance, of an Al Qaeda operative hacking into the software, is a sobering one. Or what U.S. lawyers might do to manufacturers if an autonomous car causes mayhem.

“They don’t want to make any mistakes. It will be coming up in a few years and it’s not a short-term race,” Bratzel said.

The Geneva car show opens to the public March 6 through March 16.

Neil Winton, European columnist for Autos Insider, is based in Sussex, England. E-mail him at neil.winton@btinternet.com