European Automakers In Danger Zone – US-FOREX.US
Some of Europe’s biggest automakers surprised the market after posting substantial positive free cash flows during a busy earnings week for the sector.German automaker Volkswagen
on Thursday posted an actual profit with a hefty 12.3 billion euro cash reserve, while France’s Renault
posted a loss it managed to generate positive free cash flow of 848 million euros . PSA Peugeot Citroen
also surprised investors with 470 million euros of positive free cash flow. “The cash-flow improvement in the second quarter clearly comes from lower inventory levels,” said Heiko Moehringer, an analyst with LBBW in Germany. Car and truck makers as well as suppliers to the industry, like tire maker Michelin, are saving cash by running down inventories and cutting everything from travel to staff.Yet they were cautious about their immediate future as most of the recent push in demand is driven by so-called “scrapping schemes,” an incentive program that pays car owners to get rid of vehicles that are at least nine years old, so long as they buy a new model from an automaker. It has so far proven very popular in Germany, France, Italy and Spain, among other countries. “The scrapping schemes across Europe have helped the mass producers like Volkswagen, Renault and PSA pick up the pace of their sales in the last month,” Moehringer said. “But there is still the risk that the positive impact of those incentives will reverse in 2010 as scrapping schemes expire and we will see falling car sales especially in Europe.”Analysts have said that though the drop in demand has been exacerbated by the recession, there is an issue of overcapacity in the industry and some have called on carmakers to bring capacity down.
According to investment bank Nomura, there is an overcapacity of 3 million cars every year, in a market under normal conditions. In 2007, 14.8 units were sold in Western Europe but demand has quickly dropped. Nomura estimates sales will hit only 12.5 million units this year in the same region.”Carmakers are enjoying a scrapping scheme bonanza but companies still remain cautious as there is no immediate recovery in sight,” said Marc-Rene Tonn, an analyst with M.M. Warburg Research.
The Associated Press contributed to this article.