Fiat to Cut EUR500 Mil. from European Investments in Reaction to Market Slump

Fiat's CEO Sergio Marchionne has said that the company will cut EUR500 million (USD632 million) on its planned 2012 investment programme as it expects the current slump in the European market to continue into the second half of the year. Speaking in an interview with Bloomberg Marchionne said, "The capital expenditure reduction is about half a billion euros from what we planned last year for 2012 in Europe." He added that European recovery largely "depends on many factors: first Greece, then the way in which the euro currency will continue and what Europe will do to sustain growth." Fiat has stopped additional investment and postponed a number of new model introduction in Europe. Marchionne said that the new Grande Punto, which was originally scheduled to go into production in early 2013, was one of the vehicles that may have its introduction delayed as a result of the current slump in the European market. Marchionne added that Fiat is discussing partnerships "with several people, and in some cases our architectures, including the one for the Punto, are involved in the talk." He added, "We're definitely going to be at these lower sales levels for some time to come in Europe." Marchionne was frustrated by a lack of progress that had been made over a co-ordinated response to the issue of overcapacity in the European Automotive industry. He said, "I think my proposal will just remain a Marchionne idea If there's no coordination by the European Union," and that every carmaker in Europe would "do it by itself."

Marchionne's pessimism over the short- and medium-term future of the European passenger car market was shared by Renault-Nissan CEO Carlos Ghosn. Speaking in New York at the end of last week he said, "For the moment we are planning for the worst. And the worst is now." He added, "My best scenario is zero to 1%" growth over the next three or four years. "I think we're going to have some difficulty in front of us. I have absolutely no doubt that the next three, four years that Europe is going to be stagnation, at best." Renault has actively called upon the French government for further stimulus measures (see France: 14 June 2012: Industry Minister Says French Government Looking at Ways to Aid Auto Sector) such as the eco-car incentive that it previously had in place, while other European governments operated successful scrappage schemes in the wake of the last financial crisis between 2009 and 2010. However, with public finances in most major European economies in a pretty parlous state following the initial crisis, there is much less appetite or financial ability to put into place similar schemes for a second time.

Outlook and Implications

Marchionne also said that a somewhat apocalyptic scenario for the European automotive industry would be on the cards if Greece were to exit the European currency and other countries' participation in the European single currency came under threat. He said, "If the euro disintegrates, European car sales could fall to below 10 million" units in the first year after a breakup, down from 13.6 million last year. However, the likelihood of this occurring appeared to recede slightly at the weekend with the news that the pro bailout New Democracy party had won the country's second general election in six weeks, beating out the leftist, anti-bailout SYRIZA party into second. However, New Democracy achieved less than 30% of the vote and significant challenges remain for Greece to stay on the austerity path that is required for the country to be awarded its pre-agreed financial bailout. The markets reacted positively to the news, while the US stressed that it was in everyone's interests "for Greece to remain in the euro area".

However, this short-term positive news from Greece will do little to generate improvements in the Western European passenger car market, and instead likely to limit the prospect of the current declines in the market worsening. Even if the Greek bailout proceeds smoothly and signs of a recovery emerge, it is just one building block to restoring confidence and activity into the wider European economy. As such the European car market is currently heading towards its fifth year-on-year (y/y) decline. Late last week ACEA reported that May sales in the EU were down 8.7% from May 2011—the eighth consecutive month of y/y falls, with nearly all the region's major markets recording significant declines. The German market fell by 4,8%, and France fell by the accelerated level of 16.2%. Greece, although a relatively small market by European standards, was down by 47.2% on an already very low base. For the first five months of the year there was a 7.7% fall in the combined market (see Europe: 15 June 2012: EU Passenger Car Sales Fall 8.7% in May, According to ACEA). By cutting its investment levels in Europe, Fiat is obviously taking the view that there is little point in making significant investments and launching key new models into such a grim market environment. If the Grande Punto is delayed further from its original launch date, it will be a significant indicator of the lack of confidence in the short- and medium-term development of the market.