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Russian downturn causes GM, Ford U-turn; EU slows despite discounts

Consumer demand
By Paul Hodges on 18-Sep-2014

EU autos Sept14aAugust is a holiday month for Europe’s statisticians.  So we had to wait until yesterday for a combined summary of July and August’s EU auto sales.  As the chart shows, they indicate a new slowdown is underway after the more encouraging volumes at the start of the year:

  • Sales were up only 5.6% in July and 2.1% in August (red square), versus 2013 (green line)
  • This brought the total 2014 volume gain down to 6% versus 6.5% in H1

In the major markets, Spain’s renewed incentive programme has pushed 2014 volumes up 16% to date.   The UK’s bank compensation payments means its volumes are up 10%.  But without these gains, and a strong performance in Poland, total EU volumes would have shown only half the current increase.

The other 3 major markets remained weak with Italy up just 3.5%, and France only 1.6%.  Germany, Europe’s largest market, saw sales actually fall 0.4% in August.  And, of course, major discounts continue to be needed to drive even these volumes – German discounts now average 20% and French discounts average 18%.

Storm clouds are also rising over the important Russian market.  It has become a critical market for EU manufacturers, with industry experts expecting its volume to overtake Germany by 2016.  But instead, official data shows sales down 26% in August.  The decline is also accelerating, after sales fell 17% in June and 23% in July.

Total sales are now down 12% in 2014 versus 2013.  The industry is already forecasting a 20% decline for the full year.   In turn, GM’s Opel subsidiary has announced a major restructuring at its St Petersburg plan which will cut shifts by half to just one per day.  Russia had been Opel’s 3rd largest market after the UK and Germany, and CEO Karl-Thomas Neumann told the Financial Times yesterday:

While we believe in the long term potential of Russia, there is significant immediate pressure on sales volumes and pricing while the rouble is deteriorating further . . . we are taking measures now to limit our risk and stay on course.”

Ford are also reversing course.  They had been aggressively expanding their Russian JV, but then announced in July that they were writing down their entire $329m investment in the company.

Developments in W Europe and Russia are just another example  of the way that the world is moving into a New Normal of increased volatility and lower demand growth.  Suppliers and investors who believed industry forecasts of steady growth are now having to reverse course, just like GM and Ford.

And the situation may well get worse, not better, if Russia implements its threat to ban Western car imports.

They also confirm it is foolhardy to develop straight-line forecasts for future demand.  One leading analyst had forecast Russian auto volumes would increase a steady 6%/year, with 2020 volume reaching 4.4 million.  Instead, on current trends, they could be half this level by the end of 2014, and still in decline.

As the blog will discuss tomorrow, the New Normal requires companies to challenge internal groupthink.  The example of GM and Ford in Russia highlights the growing danger of instead indulging in wishful thinking about future demand levels.