Volkswagen AG (VOW) is due to report its biggest quarterly earnings drop since 2009, while Daimler AG (DAI) is cutting costs to lift sagging profit at Mercedes-Benz, hinting that German carmakers have lost their immunity to Europe’s economic woes.
VW, Daimler and Bayerische Motoren Werke AG (BMW) are no longer able to entirely sidestep softening European auto demand by shifting cars to China and other markets, as the effects of austerity begin to ripple beyond Italy, Spain and Portugal.
“The European crisis has definitely reached the Germans,” said Stefan Bratzel, director of the Center of Automotive Management at the University of Applied Sciences in Bergisch Gladbach, Germany. Next year, as the region’s market continues to fall, “the problems for German manufacturers will really start to kick in.”
Volkswagen, which will report its third-quarter earnings on Oct. 24, is forecast to post operating profit of 2.3 billion euros ($3 billion) for the period, based on a Bloomberg survey of six analyst estimates. That would represent a 21 percent decline from the same period last year, VW’s first significant profit drop since the 2009 global recession, when earnings fell by more than 80 percent.
Until now, Germany’s big automakers haven’t been hurt by the sovereign-debt crisis thanks to a robust home market and growth in the U.S. and China. That resilience is fading as lower confidence hits German car demand and China slows.
While the German carmakers are starting to feel some pain, they remain in far better shape than more narrowly focused European competitors. PSA Peugeot Citroen (UG) is in talks with the French government over a funding lifeline for its financing arm. Fiat SpA (F) is preparing a new plan to turn around its European business, which is set to lose 700 million euros this year.
“Challenges in Europe are getting greater” and the region’s woes have spilled over to China, Ian Robertson, BMW’s sales chief, said at a company event in Munich this week. Europe faces “a lot of bumps on the road” before it stabilizes, and an auto-market recovery could take years, Robertson said.
BMW, which in the second quarter suffered its first drop in quarterly profit in almost three years on costs to introduce a new 3-Series sedan, is expected to buck the trend when it releases results on Nov. 6. Operating earnings will probably rise 2.3 percent to 1.76 billion euros, according to a Bloomberg survey of five analyst estimates.
Unlike the sudden drop after the 2009 financial crisis, the protracted nature of today’s debt problems has given automakers time to prepare for weaker demand and avoid packing dealers’ lots with unwanted cars. The German carmakers have recently stepped up efforts to respond.
In September, VW reduced its internal sales forecast for 2012 by roughly 100,000 vehicles -- more than 1 percent of annual sales -- as Europe’s slump reduces demand for cars like the Polo subcompact, a person familiar with the matter said at the time. The company, which will be burdened by charges related to its acquisition of Porsche in the third quarter, is also cutting back parts purchases by as much as 10 percent and demanding lower prices for components, suppliers say.
As demand softens for Mercedes’ aging flagship, the S-Class sedan, Daimler is eliminating a production shift in Sindelfingen, Germany. The automaker will also cut annual costs by at least 1 billion euros under a new savings program, dubbed “Fit for Leadership,” a person familiar with the matter said yesterday.
Chief Executive Officer Dieter Zetsche announced plans for the cost-cutting drive last month when the company said operating profit at Mercedes will fall this year, rather than match 2011’s earnings as the company previously forecast. The company may announce details of the efficiency program on Oct. 25, when the Stuttgart-based manufacturer releases results.
Daimler’s operating profit is forecast to decline 13 percent to 1.83 billion euros, according to a Bloomberg survey of six analysts.
The moves suggest that the carmakers are gearing up for a slow recovery. Stuart Pearson, a London-based analyst with Morgan Stanley, forecasts that the car market -- which has fallen a quarter since 2007 -- may top out at about 15 percent below its peak.
“There’s a lot of structural issues weighing on the European market,” from high unemployment to market saturation to overcapacity, Pearson said. “There’s no real solution in sight.”
That puts pressure on carmakers to shutter plants. Unused capacity in the region is forecast to rise to as much as 10.6 million vehicles next year from 10.3 million in 2012, according to LMC Automotive. The research company expects western European sales to total 11.8 million vehicles in 2013.
“Overcapacity’s a colossal problem for the industry,” said Arthur Maher, an LMC analyst in Oxford, England. “There’s a realization that this is not your typical cyclical downturn. You may have a recovery in some sense, but it won’t be a return to pre-crisis levels before the next decade.”
Fiat CEO Sergio Marchionne, who will report earnings and present a restructuring plan for Europe on Oct. 30, is leading a charge for industrywide capacity cuts. Boosted by gains at Chrysler Group LLC and strong sales in Brazil, the Italian carmaker’s third-quarter trading profit is forecast to rise 12 percent to 952 million euros, based on four analyst estimates from a Bloomberg survey.
Peugeot and Renault SA (RNO) won’t provide a clear gauge of their performance, as neither French automaker reports quarterly earnings. Still, that won’t ease pressure on Peugeot, which doesn’t have a major presence outside Europe, unlike Renault with its alliance with Nissan Motor Co. (7201)
Peugeot, which has said it may close its Aulnay factory near Paris, will have to scale back operations because the carmaker “needs to recoup its losses and get back into shape,” said Peter Cooke, a professor at the Center for Automotive Management at the University of Buckingham in England.
For the Germans, a sharper focus on wealthy buyers will keep them better positioned than their European competitors, though they have now shown they aren’t invulnerable to the crisis.
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