Europe Threatens US Automakers Recovery

By Tony Daltorio - August 3, 2012 | Tickers: FIATY.PK, F, GM, PEUGY.PK | 0 Comments

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One of the biggest economic stories in recent years, which has also become part of the current Presidential campaign, has been the recovery of the U.S. automakers from the brink of failure during the 2008-09 financial crisis. But now another crisis, this time in Europe, threatens to cut short the automakers' rebound into financial health. 

The car companies' rebound can perhaps be best seen in the latest results from Chrysler, which filed for Chapter 11 bankruptcy in 2009. It is now out of bankruptcy thanks largely to the 61.8 percent ownership by Italian vehicle manufacturer Fiat S.p.A. ADR (NASDAQOTH: FIATY.PK). Chrysler recorded a net profit of $436 million in the second quarter of this year, compared to a loss in the year ago period of $370 million. The company now expects full year net income of $1.5 billion versus 2011's earnings of $183 million. 

Chrysler has been greatly aided by the fact that the United States contributes three-quarters of the company's sales, leaving it more insulated than its U.S. competitors – General Motors (NYSE: GM) and Ford (NYSE: F) – from the travails of the European car market which suffers from the double whammy of falling sales and chronic production overcapacity. 

General Motors Europe – with its main brands Opel, Vauxhall and Chevrolet – has lost $3.8 billion just over the past three years! Part of the problem is that its brands are seen by European consumers as non-premium brands, thus giving GM Europe no pricing power. Also GM's current restructuring plan for the division lacks teeth since it involves no job losses for at least five years and merely tinkers with the production mix. 

Speaking of the production mix, GM does have a new partner in Europe – PSA Peugeot Citroen ADR (NASDAQOTH: PEUGY.PK) – which is in as deep a hole as GM Europe with its stock down 75 percent in a year. It is closing a plant in France and cutting thousands of jobs. The two troubled firms seemed to have lashed themselves together to ride out Europe's economic storm. They will produce vehicles for each other which will do little since PSA is also not considered a quality brand in Europe. 

Ford also is beset by problems in Europe, recently doubling its forecast for losses this year on the continent to $1 billion. Ford recently reported a pre-tax operating loss in Europe of $404 million and said it expects its market share in Europe to decline due to its decision not to compete aggressively on incentives for buyers. The widening losses are not good news as Europe makes up about a quarter of Ford's automotive revenues. Ford is now contemplating whether to apply some of the tools used in its U.S. restructuring to its operations in Europe. 

Getting back to the Chrysler story, its rebound may now be threatened because Fiat is now suffering greatly in Europe, as are most of its carmakers. Fiat only turned a profit in the first and second quarters of this year because of Chrysler. But Chrysler itself is simply not strong enough to carry Fiat alone in the years ahead. So Chrysler's 'savior' Fiat may need saving itself if the auto market in Europe does not turn around. It just reported losses nearly doubled in Europe to $274 million in the second quarter.

The signs are not good that vehicle sales will turn around any time soon in Europe. Sales continue to weakenen in countries like Spain and Italy which is no great surprise. But now there are signs of weakness in the auto market even in Europe's economic engine, Germany. Vehicle deliveries in Germany turned negative in May and discounts, even for premium brands like Daimler, are rising. As are automaker self-registrations (selling new cars as used). This suggests Europe's biggest market may no longer be able to soften the downturn. Look for increasingly bad news from Europe for U.S. automakers operating there.

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