Cheap SUVs for the masses and expensive limousines and sports cars for the super rich will vie for the spotlight at next week’s Geneva Car Show, while lower oil prices and the weak euro will help to add some luster to the European industry’s bottom line.
Family sized SUVs like the Renault Kadjar, Honda HR-V, Mazda CX-3 and Suzuki Vitara will take a bow, along with a front-wheel drive BMW minivan, the 2-Series Gran Tourer. General Motors Europe’s Opel-Vauxhall subsidiary hopes its new little Karl-Viva city car will help plug the gap left by Chevrolet’s European withdrawal at the end of this year.
Less affordable but guaranteed to excite the crowds will be the new Ferrari 488 GTB, the second generation Audi R8, the McLaren P1 GTR and 675LT, and the Aston Martin Vulcan. The new Mercedes-Maybach Pullman, priced at around $1 million if you go for the bomb-proof version, looks as though it probably carries politicians or bankers so it won’t inspire any positive reaction.
European sales overall are expected to stagger ahead in 2015, after 2014’s first gain since the Great Recession started in 2009. Western Europe last year grew 4.8 percent to 12.1 million.
The increasing popularity of more profitable SUVs may help ease the pain of the weak market. Sales levels reached before the economic downturn are not expected to return any time soon. European Union sales peaked at 15.2 million before the crisis struck, and even by the end of this decade are likely to be a million a year less than that, according to industry analysts IHS Automotive. This compares with the much more powerful U.S. recovery which might well threaten record highs in year or two.
Consensus this year points to an anemic European sales gain of between two and four percent. The euro’s weakness compared with the dollar will improve the German premium manufacturers competitive position in the U.S, allowing for either lower prices, more profit or an addition of content. Lower oil prices will make alternative technologies even harder to sell.
Europe’s economy is still failing to show strength after the long recession and unemployment remains high. The Organization for Economic Cooperation and Development expects eurozone growth of just 1.4% in 2015. That’s an improvement over the 0.7% for 2014, but it’s well below what Europe should be achieving. Even this meager pace could be blown off course by a flare-up with Russia over the Ukraine dispute, while the saga of economic basket case Greece seems to have been put on hold for a few more months before returning to maybe blow up the euro single currency. The European Central bank is about to start a campaign of Quantitative Easing (QE) (printing money), which in theory should boost bank lending and therefore sales of cars.
Morgan Stanley doesn’t expect this to have much of an impact.
“We still do not expect a strong European demand recovery. Excluding Britain and Spain, car sales in other major European markets have shown little sign of life. As long as unemployment remains close to peak, we would not expect this to improve. And with major auto (manufacturers) already financing companies at well below one percent, we anticipate little impact from QE,” said Morgan Stanley analyst Harald Hendrikse.
So don’t expect pricey and impractical electric cars, hybrids and fuel cells to turn into serious sales contenders.
Question over diesel
One political development is causing some angst in industry boardrooms because it threatens the future of diesel power. Roughly every other car sold in Europe is a diesel, but France has announced increased taxes on diesels because of health concerns, and eventually plans to ban them from city centers. Media coverage has underlined these concerns, and this threatens to become a bandwagon across Europe. But although there’s no doubting the increased health risk from diesel fumes, these measures and worries ignore recent regulation which means that diesels coming off production lines today are almost completely clean.
Professor Ferdinand Dudenhoeffer from the Center for Automotive Research (CAR) at the University of Duisberg-Essen agrees that this is a not going to be a problem.
“I think they (diesel critics) overestimated the effect of one person in Paris. All we know is that there will be no problem for diesels in Europe. On the contrary, with even more SUVs and problems with the high costs for (new alternative technologies), diesel will surge,” Dudenhoeffer said.
Andrew Bergbaum, London-based managing director of industry consultants AlixPartners, isn’t so sure about the future of diesels in Europe, although he still optimistic on the long-promised sales in the U.S. to pick up eventually.
“Putting environmental arguments about diesels to one side, we are already starting to see some slight weakening in the popularity of diesels in Europe versus gasoline. They’ve been hit with an economic argument, because on average, Europeans are driving fewer miles and the benefit of diesel – more expensive to buy in the first place – depends on driving a lot of miles. As people drive fewer miles that argument becomes weaker,” Bergbaum said.
Bergbaum’s relative optimism about diesel in the U.S. is due to this technology’s ability to provide more torque from relatively small engines – important for driving characteristics when engines downsize due to emission regulations.
CAR’s Dudenhoeffer is on the optimistic side of the market consensus, expecting a 3.7 percent gain in Western Europe in 2015 to 12.57 million. This includes all the big markets like Germany, Britain, France and Italy. The surge in SUVs is a big plus for manufacturers.
“In 2005 there 59 different SUV models on offer in Germany (Europe’s biggest market). By the end of 2015, the German car buyer could choose from nearly 90 different SUVs. Cheaper fuel and new models are whetting buyers appetite for SUVs. Manufacturers will have a hard time selling expensive (electric) cars in Germany and the world, while cheaper diesel will slow down alternative technology further,” Dudenhoeffer said.
Dudenhoeffer said the average price of a sedan in Germany in 2014 was close to the equivalent of $31,000, while the average SUV sold for nearly $37,500.
“Manufacturers make just over 1,360 euros ($1,543) profit per car, but at least 1,650 euros ($1,870) for an SUV,” he said.
IHS Automotive is at the low end of sales expectations, penciling in a 2.2 percent gain to 12.87 million for the slightly bigger E.U. area. IHS Auto analyst Carlos Da Silva says QE makes sense because it will stave off the biggest worry for Europe; deflation. There is still much pent-up demand to be tapped, but Da Silva warns that a lot of recent sales have been questionable.
“Although replacement demand is playing its part, a fair share is largely artificial, driven by manufacturers pushing metal through “easier” channels. This includes by manufacturers themselves with self-registrations, as well as dealers and rental companies,” Da Silva said.
In France, one in four cars was sold this way in January. In Germany it was 44 percent of sales. But the recovery was real.
“Yet we caution that the structure of the market is still quite shaky, current demand remaining too dependent on artificial support,” Da Silva said.
It may be built on shaky ground, but CAR’s Dudenhoeffer reckons European manufacturers will be feeling good, at least in the short term before huge decisions have to be made about new technology, which may bring new and dangerous entrants into the industry.
“In Geneva you will see some joy this time. With the falling value of the euro against the dollar leading to good export opportunities and export earnings, with more SUVs and higher overall profits. We won’t hear much about alternative technology, although the stands will be full of them, nor about what the software giants are up to. They won’t be in Geneva. The future of the industry may be in Silicon Valley or China. Meanwhile Germany, and Europe, will soon be turning to the theme of “automated driving”. But not this year,” Dudenhoeffer said.
The Geneva Car Show, the first big European event of 2015, opens to the public March 5 through March 15 at the Palexpo Center.
Neil Winton, European columnist for Autos Insider, is based in Sussex, England. E-mail him at firstname.lastname@example.org