Watch Out For Europe Automakers

Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

 Italy's unemployment rate is now above 11%, coming in at 11.1% (higher than the 10.9% expected) and has been over 10% for 9 months now. It rose from 10.8% in September and it looks like it will keep rising for some time. The Italian government sees the economy contracting by 2.4% in 2012, more than the average estimate of 2.2% by economists. Italy is trying to rein in its debt after having to have its bond market bailed out by the European Stability Mechanism and the European Financial Stability Facility, but it is having problems getting growth going again. If you are invested in Italy I would recommend that you get out. Not only does Italy has problems, but the ESM and EFSF had their credit rating cut by Moody's just as the Eurozone's unemployment rate ticked up yet again to 11.7%. Italy's economy needs real reforms if it wants to get out of the mess it is in.

Problems In Europe

As I said before the Eurozone's unemployment rate increased to 11.7%. That is terrible, and it looks like it is only going to get worse. Earlier Eurozone leaders were expecting the EU's GDP to grow by 0.4% in 2013, but that hope has now gone away. The EU sees itself not growing in 2013 until "late in the year". On Monday Portugal's PM said that Portugal wouldn't start to see a rebound until late 2013. Auto makers like Ford (NYSE: F), Daimler (NASDAQOTH: DDAIY), Volkswagen (NASDAQ: VLKAY) and General Motors (NYSE: GM) are feeling the pain. In September, European auto sales were down 11% year over year according to ACEA. Ford saw a 15% decline in auto sales, Volkswagen saw an 8.4% decline, Daimler saw a 6.6% decline, and GM saw a 16% decline. The macro trends are stacked against these companies as Europe slides deeper into a recession that will last well into 2013. All of these companies are being forced to scale back their operations. ACEA (European Automobile Manufacturers' Association) predicts a 8-10% contraction in the European auto market for 2012 (steeper than the 7% originally expected). 4 of the 5 largest auto markets saw contraction in Europe, with auto sales down 11% in Germany, 18% in France, 26% in Italy, and 37% in Spain. The steel industry is also feeling the pain as ArcelorMittal sees a 3-5% contraction in European steel demand, compared to 4% growth globally. Be wary of loses in Europe, as the expected slowdown management predicts for each of these auto makers will only get worse as time goes on. The macro trends aren't in the automakers favor and will continue to force auto sales lower until 2014 (maybe late 2013 if you can believe what "they" say).

Historical Trends

European auto sales have gone down for 9 consecutive months and are lower than they were during the financial crisis. If you look at this graph for Barclay's you get a good picture of what the auto market is Europe is like.


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In order to try and reverse this trend auto makers are selling their cars for less and are offering better financing deals, which cuts deep into their margins and they miss out on one of the big hidden profit makers, which is interest from the auto loans they give out. The lose out on that interest because they have to offer interest free financing in order to stay competitive. Increases in the VAT, or the value added tax, in Europe are also having a big effect on auto sales as countries like Spain increase taxes to pay down their debts.

Final Thoughts 

Europe's economy has only one way to go as a whole, and that is down. There is no way there is going to be a major reverse in their unemployment numbers or GDP statistics for some time. This will continue to push auto sales in Europe lower, maybe even lower than 1995 auto sales. Europe has to push through major reforms to turn the economy around and has to start paying off its debts and living within their means if they want to remain solvent. Auto makers have no way around the macro trends and investors should be very careful before investing in the auto market, whether it be directly in an auto maker or indirectly in a tire manufacturer or steel maker. Bearish on Europe's economy.

callumturcan has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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