European carmakers head for Detroit, face tough year

FRANKFURT, Jan 3 Reuters fileds this report: European automakers heading for Detroit's motor show next week are braced for a tough year as pricing pressure in the world's biggest car market threatens to erode profits amid an expected plunge in auto demand in the U.S. The U.S. has in recent years become a key market for some European carmakers, mostly the Germans, who have tapped American consumers' desire for premium cars. The U.S. now accounts for some 25 percent of German carmakers' combined revenues and a greater proportion of profits.

The North American International Auto Show, which starts on Sunday, presents the world's biggest car companies with an arena in which to show off their latest ideas and unveil new products.

But car company executives will this year be feeling the heat as negative effects of massive discounting from Detroit's ``Big Three'' -- General Motors Corp , Ford Motor Co and the Chrysler unit of DaimlerChrysler -- kick in.

``This year is going to be a very difficult one for all car makers in the United States,'' said Michael Raab, an analyst at Sal. Oppenheim in Frankfurt.

Although Europeans have discounted less than their U.S. rivals and still seen their sales hold up in the last quarter, a prolongued U.S. recession could dent luxury car demand, hitting unit sales and profits.

Most industry experts expect the U.S. light vehicle market to slide about 10 percent this year to 15.4-15.6 million vehicles. Carmakers are also facing smaller declines in sales in western Europe and Japan this year.

EXPENSIVE DISCOUNTING

Incentives introduced by the Big Three after the September 11 attacks in a bid to boost demand amid fears of an economic slowdown have alarming consequences.

Analysts say the policy is battering companies' bottom lines and bringing forward demand rather than creating new custom.

``With every car they sell, they lose more money,'' said Raab.

European carmakers have also used incentives, but at a lower level and analysts expect them to continue discounting as they attempt to maintain or even boost market share.

Schroder Salomon Smith Barney analyst John Lawson reckoned November incentives for the Big Three averaged 2,500 dollars per vehicle compared with 1,300 dollars for the Europeans.

``I think they will ratchet up their presence there and will maintain volume and that is the right thing to do in the long run even if profits are hit slightly,'' said Lawson.

He said a benign exchange rate for U.S. imports gives Europeans scope to raise the temperature with incentives and noted they may also sweeten purchases with vehicle improvements.

STRONG PRODUCTS KEY

With pressure also from Asian rivals, European carmakers will need to offer products which reaffirm their status as premium brands to maintain a hold on the market, say analysts.

Germany's BMW AG , currently a favourite among investors due partly to strong U.S. sales, will be hoping for a warm American welcome for its high-margin new 7-Series at the Detroit show.

The model, seen as a key profit driver, is already on sale in Europe. BMW also launches its Mini Cooper in the U.S. in the spring, with expected sales of around 20,000 per year there.

The group's strong U.S. sales are due mainly to its X5 sports utility vehicle (SUV). Other European companies will try to mimic the success of Mercedes and BMW this year in the lucrative SUV market.

Sweden's Volvo, a unit of Ford, will take the wraps off its first SUV, the XC90 and the Land Rover unit of Ford, formally owned by BMW, is set to unveil its long-awaited new Range Rover.

Amid this growing competition Porsche (quote from Yahoo! UK & Ireland: PSHG_p.F) and Volkswagen will also each bring out a jointly developed SUV later in the year.

``The SUV has been the fastest growing major segment but it is beginning to get to the growth limit,'' said SSSB's Lawson.

Volkswagen may also grab headlines in Detroit by saying it will start production of the Microbus, so far only a concept vehicle which looks like a minibus and has wide U.S. appeal.