TEXT-Fitch:EU car sales may not fully recover before end of decade

Wed Jan 30, 2013 5:40am EST

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(The following statement was released by the rating agency)

Jan 30 - A recovery in new car sales in Europe back to pre-crisis levels could take until the end of the decade, if it can be achieved at all, Fitch Ratings says. Our current base case assumes new vehicle sales to decline by approximately 3% in western Europe in 2013 following an 8.1% decrease to 11.8 million units in 2012. This would mean a 23% fall since 2007.

Structural factors and anecdotal evidence make it uncertain that sales will return to the 1999 peak of 15.1 million units. They suggest that European recovery will be slow at best and could follow the path of Japan, where vehicle sales have fluctuated since 1998 at 25% to 45% below their peak in 1990.

Owners are keeping vehicles, which are increasingly reliable and robust, for longer and are driving shorter distances. At the same time, the total cost of vehicle ownership has increased and several large cities or countries have taken measures to limit or deter car usage. Periodic surveys have also shown a declining interest in cars from the younger generation. Cyclical factors, including weak consumer and corporate confidence, high unemployment and tighter credit conditions are making matters worse.

Manufacturers of small vehicles suited to urban conditions and with fuel efficient engines are best placed to outperform. These vehicles should be well positioned to take advantage of people moving to suburbs not well connected by public transport and of the overall trend towards downsized vehicles and engines.

Nonetheless, the economy and new vehicle sales can rebound more strongly than expected. For instance, auto sales in the US recovered to 14.4 million units in 2012, up 13.4% from 2011 and 39% from 2009. This was in contrast to previous market assumptions and forecasts pointing to long-lasting depressed conditions.

The expected outperformance of central and eastern European markets as they catch up with more developed European markets in terms of car density is likely to offset persistent weakness in western Europe and offer better prospects than in Japan. Government intervention could also support sales at higher levels than underlying and fundamental demand, given the industry's importance to employment and in light of support given in the past.

As well as the gross number of vehicles sold, it will be even more important to monitor the product mix as customers increasingly decide to keep a car but opt for a smaller or cheaper model. This is in line with our view of how the market is polarising towards high-end brands on the one side and entry-level marques on the other.

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