European auto industry tries to avoid stalling

In view of soaring fuel prices, tighter bank funding and worsening economic prospects, car sales have unsurprisingly taken a beating. Although the automotive market is expected to continue to suffer in the short term, some niche areas will be less affected. Indeed, according to independent market analyst Datamonitor, the fleet leasing sector and areas of aftermarket sales have even shown signs of growth.

Auto market: leading the fall...

Figures from the European vehicle manufacturer's association, the ACEA, show Europe's new car registrations extended their fall of 7.3% in July to an unprecedented 15.6% dip in August. With consumers' monthly expenses soaring due to rising inflation, many are already cutting back on discretionary spending, particularly big-ticket purchases. Consumers are avoiding automotive purchases in particular, due to the fear that the US economic crisis will continue to spread, combined with a sharp increase in fuel prices, says Datamonitor automotive analyst Mudit Gupta. “Many consumers have resorted to deferring new car purchases, delaying their car servicing and avoiding unnecessary driving.

“Furthermore, with financial markets tightening, those consumers wishing to purchase cars on finance schemes are likely to find such purchase options less attractive,” he says.

While a lack of cheap finance options will make buying problematic, higher fuel costs are making driving tough, especially for consumers with multi-purpose vehicles (MPVs) and sports utility vehicles (SUVs). Having grown consistently over the past decade, 4x4 vehicles' share of new car registrations fell in the first half of 2008. Furthermore, there was a noticeable reduction in average engine size of the vehicles sold in the six-month period. Sales have been hardest hit at the top end of the market and the defined switch towards smaller cars has also had a negative impact on vehicle manufacturers' profitability, as larger cars tend to carry higher margins.

The greatest declines are being felt in the mature and developed western European markets, Gupta says. “This is likely to prompt a sort of balancing act whereby manufacturers will try to offset these decreases with continued growth in the emerging eastern European and Russian markets. However, even these markets have slowed of late,” he says.

Aftermarket: adding insult to injury

The aftermarket automotive parts industry will not escape the effects of the downturn either. With high fuel costs and tight household budgets, Datamonitor expects a decline in average car mileage in 2008 and 2009, thereby reducing the aftermarket product replacement rates and hence decreasing the overall aftermarket volumes. Furthermore, motorists are forecast to increase service intervals and delay vehicle repairs in order to reduce expenditure. “While it is difficult for motorists to put off the replacement of 'distress' products - parts such as batteries, tires, exhausts, which tend only to be replaced when they fail - motorists can delay the replacement of many other parts and accessories,” Gupta says.

Fleet market: saving grace

However, not all appears bleak in the industry. The fleet leasing market is continuing to show signs of sustained growth in nearly all of the European markets, with growth largely coming from small and medium-sized companies. To defend against the rising total cost of ownership and maintenance, corporate customers are still turning to operational leasing with maintenance management. This, in turn, is fuelling the continued growth of company cars. In fact fleet sales will act as a growth engine for many vehicle manufacturers, especially in an otherwise dull new car market. However, even the operational leasing market will not be immune from difficulties in the financial markets, with potential supply-side issues as many larger lessors are controlled by the major banks.

Grim outlook? Not necessarily

In Datamonitor's view, in the short to medium term the market will continue its downturn, with lower car sales. However, in the medium term Datamonitor expects the market to bounce back. In the meantime, the market will see a wave of consolidation favouring the dominance of global players and badly affecting the smaller domestic players, Gupta says.

“The outlook for the European fleet leasing market remains optimistic, while nearly all markets will see an increased penetration of operational leasing and overall company car parc.

“For the European automotive aftermarket the outlook is one of cautious optimism - where the aftermarket value, cushioned by crash-repair products, will continue to show mild growth,” he says.

Notes

Related Research: European Aftermarket Database 2008 & Datamonitor View - Car Aftermarket in Europe 2008

Datamonitor's easy-to-use interactive model European Aftermarket Database 2008 quantifies the size and segmentation of the European aftermarket by country, distribution channel and product group. It includes detailed forecasts of market volume and value to 2013.