European Auto Buyer Discounts Equal Profit Squeeze For Makers

FRANKFURT, Nov 22, 2002; Madeline Chambers writing for Reuters reports that European consumers' reluctance to buy new cars has forced automakers to offer free CD players, airbags and even cash rebates in a bid to bolster sales amid flagging demand, but the bargains bode ill for profits.

Month-by-month incentives on new cars, which cost automakers five to 10 percent of their revenues, are creeping up as companies battle it out in Europe's declining car market.

Figures published last week by European carmakers' association ACEA showing an improving trend in auto sales in October, down 2.1 percent year on year compared with a 3.6 percent drop in the year so far, obscure the bigger picture.

"The European market is improving but the quality of sales is deteriorating," said Deutsche Bank in a recent research note.

Incentives often run at about 1,000 euros per car, barely covering margins, so threatening to erode profits at mass car producers Volkswagen <VOWG.F>, Fiat <FIA.MI>, Renault <RENA.PA>, PSA Peugeot-Citroen <PEUP.PA> and the European arms of General Motors <GM.N> and Ford <F.N>.

The models with the highest incentives in Europe are currently Fiat's Stilo, VW's Golf, Citroen's Saxo and Ford's Focus, according to calculations based on data from Automotive News Europe. But the picture changes every month.

Sweeteners, which range from favourable financing deals and cash rebates to free air conditioning and super sound systems, are a permanent feature of the auto industry but they accelerate in a weak market as output tends to run further ahead of demand.

Competition in Europe, however, is still not as cut-throat as it is in the world's biggest auto market, the United States, where GM, Ford and Chrysler <DCXGn.DE> have propped up sales since September 11 last year with zero percent financing and other deals. Profits have come under pressure as a result.

European customers are more discerning and are willing to pay for a car with a perceived strong brand, say analysts.

Last month VW said incentives in Germany were on the rise and indicated its Volkswagen, Skoda and Seat brands offered just under 1,000 euros worth of market incentives per car in the first half, putting it roughly in the middle of 14 brands it measured in Germany.

Discounts are also available in Italy, France and the UK.