VW using China profits to undermine French, Italians in Europe, says report

Volkswagen is using massive profits from its China business to subsidise a price war in Europe to relentlessly build market share at the expense of competitors in France and Italy as well as Ford and GM Europe, according to a report from Bernstein Research.

In the first half of 2012, VW raised its market share in Western Europe to almost 24 per cent, up from 22.4 per cent in the same period of 2011. Overall sales in recession hit Western Europe dived nearly seven per cent in the first half to just under 6.5 million, according to the European Automobile Manufacturers Association, known by its French acronym ACEA.

VW managed to hold its sales (including its SEAT, Skoda, Audi and other luxury brands) relatively steady at minus 1.4 per cent, ACEA data showed. But Peugeot-Citroen and Renault of France saw their sales slump 14.0 per cent and 17.1 per cent respectively. Fiat of Italy’s crumbled by 16.9 per cent. GM Europe’s Opel-Vauxhall slid 15.1 per cent. Ford Europe was in the red to the tune of only 10.3 per cent, although in June sales fell a scary 17.0 per cent, the ACEA data showed. Kia and Hyundai of Korea raised their sales 27.6 per cent and 10.8 per cent.

Bernstein analyst Max Warburton said VW’s success reflects success in China and Germany’s membership of the euro.

“VW is using super-normal Chinese profits to subsidise a price war in Europe, and since it operates in the same currency as competitors, it no longer has the old ‘natural brake’ of a rising Deutschmark to slow its export success,” Warburton said in the report.

Before the introduction of the euro in 1999, if competitors in countries like France and Italy fell behind competitively, their own currencies could sink in value, allowing prices to compete. If they couldn’t compete in quality, they could compete with price by devaluation. At the same time, if a country was successful, like Germany, its currency would appreciate, raising its prices, and helping competitors. In the euro currency zone this is impossible. For France and Italy to compete with Germany, they must slash costs, eventually go out of business, or leave the euro.

“Can the French and Italians escape the ever increasing pressure from the Germans?” asks Warburton.

“We’re increasingly unable to see a way forward for them. Consumers prefer German cars. They are being offered at ever lower prices. Locked in the same currency, the non-Germans can’t devalue their way back into competition,” Warburton said.

“Are the Germans eventually going to 100 per cent market share? Obviously that’s not possible. The Asian brands will remain relevant, and the French and Italians will survive in some slimmed down form possibly reduced to LCVs (vans) and certain niche segments,” he said.

This would all change if France and Italy dumped the euro and returned to their original currencies, while the Germans went back to the Deutschmark. That seems unlikely. It would also torpedo Ford and GM Europe, which are mainly based in Germany and would have to sell their mass market cars in more expensive, revalued Deutschmarks.