GM focuses on low-cost autos, as European sales remain weak

Consumer demand

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EU autos Aug14Low growth and low-cost have become the dominant features of Europe’s auto market.

Europe’s modest rise in auto sales continued in June, with volumes up 4.5% versus 2013.  But as the auto association reminds us, this “is the second lowest level in the month of June since reporting began in 2003“.  And the detail of the sales increase is not encouraging for the future:

  • HI sales are up 6.5% at 6.6m (red square) versus H1 2013 (green line)
  • But overall, European sales are down 5m from their peak, with France down 11%, and Spain and Italy down 47%.
  • Only Germany and the UK are selling the same volume as in 2007, and both are up less than 1%
  • The German market has been supported by heavy discounting averaging €2700 ($2600) per car
  • The UK market has been supported by bank mis-selling compensation payments of £15.5bn ($26bn)
  • Average payments of £3k – £5k have often been used as down-payments for new cars
  • Other major markets such as Spain have also depended for current sales rises on the re-introduction of incentives

And as the Financial Times reports, the champagne is definitely not flowing at Europe’s carmakers.  Opel’s CEO warns:

The market in Europe is not really growing. The year started off pretty bullish. We are all a bit more cautious now. There are areas with growth, but it is certainly worse than we thought at the start of the year.”

In turn, operating rates are close to 70%, with nearly a third of European capacity sitting idle.  GM subsidiary Opel lost $2.75bn in 2012-13, and Peugeot lost €7.3bn, whilst even Ford lost $1.6bn in 2013.

Companies are now starting to take action to restore profits.  Opel are closing their Bochum factory, and others are likely to follow.  These will create job losses in supplier factories as well, reinforcing the cycle of decline.

In addition, heads are starting to roll at the top of the major companies.  Volkswagen’s head of production and its head of global marketing have left in the last 2 weeks.

At the same time, companies are starting to wake up to the fact that the market itself has changed, probably forever:

  • In 2008, at the end of the SuperCycle, GM had 10.4% of the market versus just 4.9% for the low-cost brands
  • Today, Dacia, Hyundai and Kia have 9.1% versus just 7.9% for GM

GM, like most companies, have been incredibly slow to recognise the arrival of the New Normal.  Now, they are finally starting to catch up.  But they are a long way behind the leaders.  As Opel’s CEO admits,

Dacia is a great thing.  GM is definitely not Dacia, but this whole budget and entry-level market segment is very interesting. They can be admired. We are definitely looking at the segment.”

This confirms the blog’s long-held view that suppliers to the European industry need to radically review their portfolio.  ‘Design to cost’ is the key parameter.  The successful business models of the past are now irrelevant for cash-strapped consumers.

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