Germany Joins Low-Speed Europe; When even Germany stops motoring, you know you have a problem

April 22, 2013, 1:24 p.m. ET

Germany Joins Low-Speed Europe


When even Germany stops motoring, you know you have a problem.

The woes of Europe’s auto industry show no sign of abating: European Union auto sales were down 9.8% year on year in the first quarter. But within the data, there is an anomaly. In Germany, Europe’s supposed economic strongman, car sales fell 12.9% over the first quarter compared with 2012; in the moribund U.K., sales rose 7.4%. Unfortunately, Germany’s slowdown, not the U.K.’s acceleration, is the truer guide to the health of the European market.

The U.K.’s outperformance should be put in perspective. Car sales in 2012 were still 20% below their 2003 peak, despite rising 5% from 2011. The post-2007 sales slump is still affecting the market now, because it has restricted the supply of cars currently available in the second-hand market. Auction prices for cars sold in “part exchange”—when the old car is sold as part of the deal—for another rose 23% last year, according to Sanford C. Bernstein. Consumers might as well buy a new car instead of an increasingly pricey old one. With interest rates seemingly stuck at 0.5%, car sellers have been able to offer generous financing terms.Other, more temporary factors could explain the U.K.’s resilience, Bernstein suggests. U.K. consumers have received a total £8.4 billion ($12.8 billion) in compensation for mis-sold insurance policies, a windfall they could be spending on new cars. The relative strength of sterling, at least last year, may have helped, given that 85% of U.K. sales are of imported cars. Meanwhile, there has been a spate of new car models introduced in the U.K. that are more fuel-efficient—tempting, given the country’s persistently high gasoline prices.

Germany’s sudden aversion to new cars has been more puzzling. The latest 17% year-on-year drop in sales in March was partially attributed to there being two fewer working days this year. But German car manufacturers are generally at a loss to explain the sales slump, other than to cite weak consumer confidence amid continuing uncertainty around the European economy.

The concern is that Germany’s car market is simply now catching up with other depressed European markets. Germany’s car sales last year were still only 11% short of their 2006 peak, whereas Spain and Italy’s markets have shrunk about in half since precrisis highs.

The further bad news is that a recovery could be some way off. Car markets in countries undergoing deleveraging take five to seven years to recover lost ground on average, according to Morgan Stanley MS +0.63% . Japanese car sales are still 30% below their 1992 peak.

The German car-market weakness has removed the veneer of invincibility from its auto makers. Shares in VolkswagenVOW3.XE +0.78% which makes more than 40% of its sales in Europe, with 40% of those in Germany, are down 15.7% this year, while struggling rivals Fiat FI.MI -1.84% and Renault RNO.FR +2.31% are up 12.2% and 17.1%, respectively. As the European car market gets tougher, even the tough are stalling.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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