European Automakers Turn to Emerging Markets to Offset Weak Sales at Home

By Jennifer Yousfi
Managing Editor

A trio of European automakers, including Volkswagen AG (OTC ADR: VLKAY), yesterday (Wednesday) released stronger than expected second-quarter results based on strong car sales in emerging markets.

In addition to Germany’s Volkswagen, France’s PSA Peugeot Citroen SA (OTC ADR: PEUGY) and Italy’s Fiat SPA (OTC ADR: FIATY) reported yesterday, and reaffirmed their outlook for the remainder of 2008, which gave all three shares a boost in European trading.

“Volkswagen's successful model rollout, leaner processes and disciplined cost management are enabling us to grow profitability,” Chairman Martin Winterkorn said in a statement.

“The operating environment has become tougher and is demanding considerable efforts from the automotive industry. This does not make it easy for us. However, we are well-positioned and have the right strategy to master the tasks ahead of us,” Winterkorn added.

Much of the gain in earnings for all three European automakers was attributed to sales growth outside of the 15-nation Eurozone, where the number of new car registrations is actually on the decline. Emerging markets such as the BRIC nations of Brazil, Russia, India and China were strong markets for the European automakers.

“Peugeot and maybe Volkswagen will buck a downward profit trend in 2008,” Howard Wheeldon, senior strategist at London-based BGC Partners LP told Bloomberg News. “The European carmakers that suffer most” will be the manufacturers with less trade outside the mature western European and U.S. markets, he added.

European automakers also benefited from a currency conversion boost, as the euro remains strong against most other currencies.

Domestic Car Trouble 

While Europe’s carmakers are triumphing over maturing markets and high oil prices, U.S. automakers that have traditionally focused on larger, less-fuel-efficient models continue to struggle.

General Motors Corp. (GM) yesterday announced second quarter sales dropped 5% to 2.29 million vehicles, while Toyota Motor Corp. (ADR: TM) announced its sales gained 1.8% to 2.41 million vehicles.

Toyota’s new lead will likely bring to an end the 77 years GM has spent atop the global leader board as the largest automaker. In 2007, GM narrowly beat out Toyota by just 3,100 sales.

Outside of Europe and North America, GM saw a 16% sales increase fueled by strong demand in Latin America and Asia.

“There was not quite enough sales volume in these emerging markets to offset weakness in North America, more specifically in the U.S.,” GM's chief sales analyst, Mike DiGiovanni, said in a conference call yesterday, Bloomberg reported. “The short-term outlook remains challenging.”

News and Related Story Links:

• Money Morning:
  GM Tries to Reverse Course, but Can it Catch Toyota?

• MarketWatch:
  European auto giants stand by 2008 forecasts

• Bloomberg News:
  VW, Peugeot, Fiat Beat Earnings Estimates, Defying Oil Gloom

• The International Herald Tribune:
  Results from European automakers confound gloomy expectations

• Bloomberg News:
  GM Falls Further Behind Toyota in Global Sales Race