European Car Manufacturers Face Up to Long-Anticipated Difficulties

on Oct 26, 2012

European car manufacturers suffered a week of reckoning as Ford, Peugeot, Daimler and even Volkswagen felt the true effects of the shrinking car market.

**Ford Job-Cuts**
Ford (NYSE:F) announced it will be closing its plant in Genk, Belgium, by the end of 2014, and will be moving the production of its new mid-sized models in an underused factory in Valencia, Spain, where wages are considerably lower. According to analysts, the plant’s closure will bring up Ford’s overall capacity utilization in Europe from around 70 percent to as much as 82 percent by the end of next year. The closure is expected to cost around $1.1 billion (£686.5 million) and leave 4,300 employees jobless but save the company $730 million (£587 million) a year.

Despite no formal announcement, unions in the UK claim that another 1,500 jobs are under threat as the car manufacturer is planning to shut down its operations in Dagenham as well as end production of the Transit van at Southampton.
The decision to end the Transit production is a result of a two-third slump in production at the plant due to the economic downturn. The plant will most likely be relocated to Eastern Europe. Caroline Nokes, Conservative MP for Romsey & Southampton North, said that closure of the Transit van factory would be a “bitter blow” for Southampton.

**Daimler Reduces Earnings Estimates**
The German Luxury car and truck maker (FRA:DAI) reduced its full year group earnings target and pushed back key divisional profit margin targets from 2013 due to a “significant worsening of the market environment”. The Financial Times reported that the new forecast for earnings before interest and taxation is at around €8 billion (£6.44 billion) compared to the previously estimated €9 billion (£7.24 billion). In a miss-released note, Daimler’s chief executive Dieter Zetsche said that “due to the economic challenges, Daimler will not match the high prior-year ebit in full-year 2012.”

!m[](/uploads/story/646/thumbs/pic1_inline.png)The stock of the car manufacturer fell 2.7 percent to €36.79 in early Frankfurt trading.
The Mercedes-Benz unit of the company is simultaneously trying to cut costs and boost investment in new plants and models in order to remain competitive with rivals Volkswagen and BMW, who have pulled ahead in both unit sales and profitability.

While Audi and BMW have reported double-digit margins this year, Mercedes-Benz return on sales fell from 8 percent last year to 6.4 percent in the third quarter of this year.
“Daimler’s repetitive disappointing fundamental performance is bad enough. However, combined with outstanding execution at its peers VW and BMW it leaves only one conclusion in our view: Daimler will remain an unrewarding place for shareholders,” opined Arndt Ellinghorst at Credit Suisse as quoted by the FT.
**Peugot Receives State Aid**
This week Peugot (EPA:UG) announced a state backed deal with banks on €11.5 billion (£9.26 billion) refinancing and had state guarantees of a further €7 billion (£5.63 billion) for Banque PSA Finance. In return to the funds it receives, the car manufacturer promised it will halt dividends and scrap stock option awards to executives.
“It’s not state aid, it’s state support…It’s priced at market values,” CFO Jean-Baptiste de Chatillon said.
In the third quarter the company reported a 3.9 percent decline in sales and warned that its net debt would rise to €3 billion (£2.41 billion) by the end of this year from €2.4 billion (£1.93 billion) in the second quarter. Sales fell to €12.93 billion (£10.4 billion) from June to September as the carmaking division fell 8.5 percent to €8.25 billion (£6.64 billion).
Even Europe’s biggest car manufacturer Volkswagen (FRA:VOW) has been hit by demand shortage, reporting a 19 percent drop in its third-quarter operating profit to €2.34 billion (£1.88 billion).


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