The European auto market is in for a long, drawn-out recovery, according to a new outlook report by Fitch Ratings Inc.
To give you an idea of the grimness of the forecast: The New York-based credit ratings firm compared Europe to economically stagnant Japan, where auto sales peaked at 7.8 million units delivered way back in 1990, according to the Japanese Automobile Manufacturer’s Association. For the last 22 years, annual auto sales have not ecliped that figure.
“A recovery in new car sales in Europe back to pre-crisis levels could take until the end of the decade, if it can be achieved at all,” Fitch said Wednesday.
Fitch estimates that Western Europe’s new vehicle sales will continue to decline in 2013, by 3 percent, compared to the 8.1 percent fall in 2012 deliveries. If this year’s estimated decline turns out to be accurate, auto sales in that region will have fallen 23 percent since 2007, the year before the onset of the last global economic crisis. Last year Western European consumers bought 11.8 million units, according to Fitch.
Adding to the problem is that consumers in Europe are gravitating to smaller cars, shorter driving distances and longer periods of use between purchases. Europe’s larger cities have instituted measures to dissuade car ownership in an effort to reduce traffic congestion and emissions. Cars themselves have become more reliable, too. Also, surveys have shown that younger people are less interested in car ownership across the developed world. All of these factors will provide headwinds to recovery of the European sector, according to Fitch.
And this doesn’t bode well for foreign automakers, either. On Tuesday Ford Motor Company (NYSE:F) warned that Europe will continue to drag on international sales, which helped push its stock price down over 5 percent despite the company issuing a better-then-expected earnings report for its fourth quarter. Other auto manufacturers have echoed concerns about Europe in their guidance statements.
The European Automobile Manufacturers Association recently reported that demand for new cars in the European Union’s 27 member states hit a 17-year low of 12 million units. Sales in the trade federation of European states fell 8.2 percent last year, the steepest drop since 2007, indicating that recovery hasn’t even started.
“We see a very long road ahead. It’s at least a ten-year road to recovery,” said Jeff Schuster, senior vice president of the auto industry forecaster LMC Automotive, which predicts European auto sales to decline 3.3 percent this year. “There’s a lot of restructuring ahead, with way too much overcapacity in Western Europe right now.”
Indeed, the European auto industry is at a crossroads. Many factories are underused, or even idle. Such underused capacity is terrible for car companies because the plants cost a lot to maintain. Most industry analysts say the only way for the industry to recover is to address bloated capacity and payroll. But those decisions are unpopular, and in countries like France and Italy, practically grounds for revolt.
So, is Europe destined to become perpetually stagnant like Japan?
“I don’t think it’s quite as bad as Japan,” said Schuster. “But I do think there are definitely structural issues that would have to be completely addressed to get the market back to previous levels.”