European Car Prices Could Impact Motor Manufacturers' Credit Quality
3 August 1999
Alignment of European Car Prices Could Impact Motor Manufacturers' Credit Quality Says DCR
LONDON, Aug. 2 -- Car companies which derive
disproportionately large proportions of their revenues from automotive sales
in the United Kingdom and Germany could be significantly affected by the
current investigations into perceived price fixing, says Aidan Cheslin of Duff
& Phelps Credit Rating Co. (DCR), the global rating agency. "Traditionally
the UK and Germany are the two most expensive countries in Europe (pre taxes)
to buy motor vehicles."
Motor vehicle manufacturers benefit from an exemption to EU laws that
prevent price setting. However, popular opinion is that this exemption has
been pushed beyond the limit of fair practice and the matter is currently
under review by an EU Commission. Volkswagen was recently fined for charging
more in Germany than Italy for some of its models.
Prices are controlled effectively by the manufacturers maintaining a tight
rein on dealer franchises. This control mechanism is also within the scope of
the investigations. Furthermore, the Competition Commission in the UK is also
looking into the high new car prices in Britain, and the knock-on effect which
is distorting the second-hand market. The UK commission recently took action
against Volvo but any punishment was suspended upon the promise of good future
practice.
Examples of pre-tax base prices for motor vehicles in the United Kingdom
reaching levels 50 to 80 percent greater than those in the cheapest EU nations
are not uncommon. Recent studies have also shown German prices to be the
highest on mainland Europe, often 20 to 25 percent greater than the lowest
values. Attempts by manufacturers to curtail the average consumer's overseas
purchasing freedom by limiting warranty or servicing options back home or by
charging a "UK conversion fee" have been successfully challenged by consumers
and ignored by a growing number of dealers, particularly those either in more
liberally governed nations such as Holland or in states within easy reach of
the UK. Perhaps the most worrying change for the manufacturers in the
short-term is the rapidly rising level of consumer awareness. Estimates
suggest that several hundred cars per day purchased outside the United Kingdom
now enter the country, bound for private customers.
The potential impact of forced price reductions for an automotive
company's corporate credit rating is particularly worrying in cases where
these manufacturers' UK and German sales represent a large proportion of a
given company's sales volumes. A simple stress analysis on the sales revenues
of BMW Group, which includes Rover, shows that if UK prices were to fall by
35 percent and German prices by 20 percent, profitability would be reduced to
zero. However, motor vehicle manufacturers may be permitted to slightly raise
prices in the lower priced countries and would certainly take action to cut
costs, perhaps by relocating some production facilities. The most likely
final scenario would be a more standardized price somewhere between current
highs and lows and DCR believes that this could result in lower credit ratings
for the exposed European automotive companies.
DCR is a leading global rating agency with 33 local market offices
providing ratings and research on debt issues and insurance claims paying
ability in more than 50 countries. For additional research, visit DCR's web
site at http://www.dcrco.com. DCR's research is also available on Bloomberg
at DCR and First Call's BondCall Direct/Research at
http://www.firstcall.com, as well as through other third-party providers.