PSA Peugeot Citroën reported Wednesday that second-half profit slumped 56 percent as slowing sales of its automobiles and Picasso van forced Europe's No. 2 carmaker to cut output and prices. Earnings will be little changed in the first half.
Peugeot's fourth-quarter vehicle sales in western Europe fell 5.5 percent to 597,500 cars and vans, exceeding the market's 2.9 percent drop. Customers were drawn away from the aging 206 and 307 models and Picasso van to more recent competing models including the Golf, made by Volkswagen, Europe's largest auto company, and Renault's Clio subcompact.The fact that the European market as a whole dropped 2.9% is not good. The fact that Peugeot dropped more is probably less interesting given that it will no doubt be coming out with newer models to replace the older ones. Renault today showed the same problem:
Renault SA, the French carmaker headed by Carlos Ghosn, said second-half profit tumbled 16 percent as sales for the Megane line of compact cars slumped. The company said operating profit this year will fall from 2005's level.
Sales last year of Megane models, which include the Scenic van, fell 8.9 percent worldwide to 820,526 vehicles. In western Europe, demand for the Megane fell 12 percent in 2005 to 619,462 cars and vans.
Renault booked an extra 700 million euros in costs from ``commercial efforts'' last year compared with 2004 as it discounted cars to try to attract customers, Moulonguet said, without providing a total figure.
What this last bit is saying is that even with discounts it is proving hard to shift cars, a classic sign of an over supplied market. This is something that I can confirm through anecdotal discussions with car dealers as a result of part of my day job. The European dealers report a significant amount of what we in the high tech world call "Channel stuffing", i.e. pushing manufactured product into the distribution channel even though the distribution channel has sufficient to meet demand.
There are some good reasons why car makers are in trouble, particularly in Europe. Firstly there is the overall economy which is less than robust with high unemployment, high taxation and no growth, leading to a decline in disposable income. Then there is the slow but steady improvement in quality of cars made in places like China or Romania which means that those based in higher wage economies have a problem since labour costs are a major cost factor. In addition it is arguable that car makers are victims of their own success in improving the safety and reliabilitiy of their product. In the 1970s cars would rust away or otherwise suffer problems that meant that after five years or so it was usually worth throwing them away and buying a new one. These days most cars run just fine for ten years or perhaps longer. Since the (European) population isn't growing much even though the percentage of people owning cars is gradually rising this doesn't counteract the huge improvement in quality of the product.