German carmakers add to industry gloom

Publication date: 13 March 2009

German carmakers add to industry gloom

German carmakers added to the persistent gloom in the car sector on Thursday after Volkswagen predicted an “extreme” year of falling earnings and cost cuts, while premium carmaker BMW posted a large loss in the fourth quarter. Volkswagen vowed to slash investments by €2bn and to cut costs by more than €1bn as it warned of a large drop in profits – but not a loss – this year. “2009 will be an extreme, a hard year,” said Martin Winterkorn, Volkswagen’s chief executive.

The head of Europe’s largest carmaker predicted that global car sales would fall “significantly” below the threshold of 50m vehicles, compared with the 55m sold industry-wide in 2008. Mr Winterkorn said he expected the crisis to bring sweeping consolidation to the Western car industry.

“Two or three European and one American carmaker will surely remain,” he said, underscoring the dramatic effects the rapidly falling sales and the large cash drain have on carmakers worldwide.

He took a potshot at German rivals Daimler and BMW when he said that to co-operate in purchasing would not be enough in the current environment. “One needs technological co-operation and to achieve that, you have to have a clear technological leader,” he said. Daimler and BMW have been talking for more than a year about a technological tie-up but have so far achieved little progress. Industry executives blamed the pride and complacence of both carmakers’ engineers for the stalling talks. BMW, the largest premium carmaker worldwide, on Thursday reported a full-year loss before tax and interest of €718m, much worse than the market had expected.

The Bavarian carmaker’s share price fell as much as 12 per cent earlier in the day after it said further risk provisions for leased cars, rising loan defaults and higher personnel expenses dragged its full-year profit down to €330m, almost 90 per cent less than in the year before. BMW’s shares recovered to close up 2.74 per cent at €23.41. In contrast to Volkswagen, which posted a 40 per cent drop in net liquidity to €8bn, BMW increased the liquid assets in its automotive business by €1.8bn to more than €9bn.

Analysts said BMW’s numbers were not as bad as it might seem. “This is a kitchen-sink strategy; they have put everything into the fourth quarter,” Arndt Ellinghorst, analyst at Credit Suisse, said. “It is sensational that they have not burned cash in their industrial business, which is because they were much faster in cutting production than their rivals.”

VW and Daimler have seen a sharp rise in the number of unsold cars in the fourth quarter after they reacted slowly to the demand slump. This has dragged both carmakers’ net cash flow into negative territory in the last three months of 2008.

Hans Dieter Pötsch, Volkswagen’s chief financial officer, said he was optimistic that the carmaker would have a positive net cash flow this year. He affirmed that a loss in the first quarter was possible, but added that he saw a “glimmer of hope” to fare better in the second quarter.

In the past year, Volkswagen reported a 13.7 per cent rise in its full-year net profit to €4.7bn, becoming one of the few carmakers worldwide to see an improvement in its earnings after industry sales started to drop dramatically last summer.

Some of its rivals, such as Toyota and PSA Peugeot Citroën have even predicted a loss in 2009. Volkswagen’s sales were 1.3 per cent higher at 6.3m vehicles last year, while revenues increased 4.5 per cent to €113.8bn. While BMW cut its dividend by more than two-thirds to €0.30 for each ordinary share, Volkswagen slightly upped its payment to €1.93 a share. Mr Winterkorn denied that Volkswagen had been pressured by its majority shareholder Porsche to lift the dividend. Volkswagen is aiming to gain market share this year with new, low-consumption models. It wants to bring 60 new models and product upgrades to the market in 2009, compared with the 52 that it launched last year.

In the first two months of this year, Volkswagen sold 15 per cent fewer cars and trucks across its nine brands, which include VW, Bentley and truckmaker Scania, although it gained market share as car sales dropped 23 per cent globally.

Source: Financial Times