Although the headline sales figures in Western Europe may be positive, making money out of the market remains a difficult task for mid-range OEMs.
IHS Automotive perspective
The European market has posted healthy headline sales figures in the first four months with an 8.2% y/y increase, but there are concerns that the highly aggressive discount environment and the growing practice of self-registrations is hurting profitability.
The practice of self registration is where dealers pre-register cars in order to use them as dealer demonstrators, cars for staff or even just with the intention of selling them as a heavily discounted nearly new car. These cars have no allocated customer order and therefore artificially inflate registration figures and the practice has hit the headlines when it was reported that 50% of Citroën's DS brand are self registrations in the German market.
While some self registrations are justified in terms of dealer operations the practice appears to be increasing in Western Europe and can only depress dealer and OEM margins. While the Western Europe market may be buoyant on the surface, there is growing evidence that the environment is extremely difficult for many OEMs and that generating profits from the market is difficult for many mid-market brands.
There is growing evidence that many OEMs are relying on the practice of self registration as a way to bolster sales in the ultra-competitive Western European market place. The practice has been highlighted by a report in Automotive News Europe (ANE) which quoted data which claimed up to 50% of Citroen's DS brand registrations in Germany were self registrations by dealers. The practice entails dealers pre-registering cars that have no allocated customer order. They are then used as dealer demonstrators, as cars used by dealer staff members or simply sold as nearly new second-hand cars with a very substantial discount. The DS brand is in the process of being rolled out across Europe as a standalone brand, having previously been badged as Citroen DS. However, sales are falling as the company has had no new product out in four years after the rapid initial launches of the DS3 six years ago, followed by the DS4 and DS5 two years later. ACEA sales figures for the EU28 countries saw the brand's sales volumes fall 16% to 27,236 unit despite an overall market that rose by 8.1% y/y. The higher sales volumes are not necessarily likely to lead to higher profits and margins for the European carmakers, with Peugeot CEO Maxime Picat also talking to ANE and saying, "So far this year the European market had a growth that has been more quantitative than qualitative". Self registrations are at a record high in Germany according to the DataForce data with 32% of cars self-registered, and there are high levels in France and Spain, while the UK has the lowest average for all the European major markets of 7%. Also commenting on the environment in Western Europe, Ford of Europe's Mark Fleet also hinted at an environment where a large amount of registrations were occurring with no end customer allocated. Fleet said, "If I look at the channels – in terms of retail, fleet, rental and demo – there is a little bit of a disproportionate growth in the short cycle industry, in rental and demos, which supports the view that there is still overcapacity out there with cars looking for homes." He added, "Clearly there is still overcapacity around in the marketplace even with this industry upside, not everyone has taken the scale of actions that we have to try and right size capacity to demand. You certainly see that manifested in the UK. If you visited any one of a number of competitive dealer franchises in the UK you would find significant volumes of self-registered units for sale."
Outlook and implications
Despite the headline improvements in sales volumes in Western Europe, it appears to be developing increasingly as a two-speed market in which premium brands are able to generate profits through range expansion and moving into the traditional segmentation territory of mid-market OEMs, while those companies struggle to maintain share and profitability. The issue stems from ongoing overcapacity in the European market, which means that OEMs continue to have high fixed cost bases and capacity utilisation at most plants operated by mid-market brands remains under constant strain. These leaves these OEMs constantly trying to balance between maintaining efficient levels of plant utilisation and over production which ultimately has the effect of depressing pricing. Growing levels of self-registrations may help production lines keep moving but ultimately it is not a sustainable trend for OEMs that want to address efficiency and profitability. In the last year Ford and General Motors (GM) have respectively closed their plants at Genk, Belgium and Bochum, Germany and it is likely more will follow in the future. In the first quarter of 2015 GM Europe posted an adjusted-EBIT losses were USD200 million, compared with USD300 million a year, and expected to lose money again this year after 2015 was originally targeted as the year it would return to the black. The full-year EBIT loss in 2014 was USD1.369 million. Likewise Ford lost USD185 million in the first quarter of 2015, although a significant portion of this loss was apportioned to the situation in Russia. The firm lost USD443 million for the full year in 2014.