British International Motor Show: Green gloss masks red shift for car industry

Last Updated: 2:05am BST 22/07/2008

In the week of the British International Motor Show, car makers are being hit by the double whammy of soaring costs and falling sales, reports Russell Hotten
Car industry chiefs gather at this week's British International Motor Show desperate to bolster consumer confidence, but knowing that in reality they face a long haul out of recession.

Cars running on alternative energies will be a big theme of the show as manufacturers unveil their products of the future. But it is today's financial turmoil, not tomorrow's greener technology, that is exercising the minds of car consumers and producers.
European car sales fell 7.9pc in June year-on-year and manufacturers are reining in production. Fiat, Italy's largest car maker, is extending summer plant closures, and Renault, France's second largest producer behind PSA Peugeot-Citroen, is scaling back production of its mid-sized Laguna hatchback.
Things are even worse in America. US car sales last month hit a 15-year low. Ford's sales were down 28pc year-on-year, and Chrysler's drop was 36pc. General Motors, still marginally above Toyota as the world's largest car maker, is cutting jobs, selling assets, and has announced that the dividend will be scrapped - the first time in 22 years GM has not paid out.
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Several major European manufacturers and tyre companies report profit figures over the next week, with analysts and investors forecasting a string of warnings about market conditions. Second-quarter numbers from Volkswagen, Europe's largest car maker, might be a ray of sunshine in the gloom, with commercial vehicles in the past three months having been particularly strong.
Elsewhere, however, there are likely to be revisions to more optimistic sales forecasts made at the start of the year. Arndt Ellinghorst, analyst at Credit Suisse, says in a research note: "Most companies are still heading for 'old world' financial targets for this year and for 2009. Since executives can't perform miracles, the unprecedented external environment will more likely lead to target revisions."
Falling sales are allied to soaring raw material costs - steel prices are up 63pc on 2007 - and investments needed to meet new CO2 emission targets. Mr Ellinghorst said: "We expect earnings revisions from Renault, BMW and potentially Michelin. But besides official profit warnings, 'soft' company outlooks will undoubtedly reflect increased macro concerns."
Even in places such as China, Asia's biggest car market, which has offset failing sales in Europe, US and Japan, times are getting tougher. China's stock of unsold new vehicles rose 50pc in the first six months of 2008. According to official figures, the unsold stock was 170,000, up from 110,000 at the end of 2007. Average new car prices fell 3pc.
Western and Japanese car makers are estimated to have invested more than $20bn in China's automotive market in recent years.
"Auto makers were too optimistic when planning their capacity expansion and didn't expect the slowdown," said Tang Jun, an analyst at Guangfa Securities, in Guangzhou. "Dealers are hit the most by rising inventory and may have to slash prices further to help with liquidity." The stock market prices of Chinese car makers, including Shanghai Automotive Industry Corporation and Dongfeng, have fallen sharply in recent weeks.
It is evidence that no corner of the globe is unaffected by economic woes in the motor industry. Whatever green gloss manufacturers put on this week's motor show, it is the spilling of red ink that is more of a worry as company profits tumble.