Alignment of European Car Prices Could Impact Manufacturers' Credit Quality
11 October 1999
Alignment of European Car Prices Could Impact Motor Manufacturers' Credit Quality Says DCR
LONDON, Oct. 11 --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 Martin Squires of
Duff & Phelps Credit Rating Co. (DCR). "Traditionally the UK is one of the
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 is due
to publish its findings in December 1999, but on October 5th recognized, in an
interim report, that the automobile retail sector is too heavily biased toward
the manufacturer and that this is inflating prices. Discussions are
continuing with leading market participants and other interested parties with
a view to finalizing fair remedy recommendations, although it seems only a
matter of time before UK consumers see price reductions.
Possible remedies being discussed include: various methods autonomising
dealerships such as allowing them to sell more than one make; determine their
own focus on repairs or sales; and prohibiting manufacturers from recommending
retail prices. DCR expects that the Commission is most likely to introduce
measures liberalizing dealers from a combination of the restrictions imposed
on them by the manufacturers, and that these measures would have a knock-on
effect of reducing new and used car prices in the UK by a considerable margin
in the relatively short term.
Examples of pre-tax base prices for motor vehicles in the United Kingdom
reaching levels 50 percent greater than those in the cheapest EU nations are
not uncommon. 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. A growing number of dealers have also continued the practice
regardless, 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 sales represent a large proportion of a given
company's sales volumes. Many top European car-makers treat the UK as a
"golden zone" where they can rely on earning hefty margins and on offsetting
production inefficiencies and loss-leaders elsewhere in the continent. As
this changes, motor vehicle manufacturers may slightly raise prices in the
cheaper 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.