Before anyone gets too excited hearing news that car sales across twenty-eight European nations rose by 16% in December pause for thought for a minute or two and take on board that through 2009 just 14.5m cars were sold across Europe. Admittedly that was up just a fraction on the 14.7m units sold in the awful year of 2008 and that was well down on the near 16m number of cars sold during 2007. Narrowing it down further would be to say that while government incentives such as car scrappage schemes benefited sales in many countries in ‘mature’ Western Europe in 2009 without this benefit we may have been looking at the worst year for sales in over a generation.

Does the overall car sales story for Europe look any better for 2010? Overall we expect sales to be at best flat to maybe down by just 1%. In looking at such a wide variety of markets be they in the Eurozone area or not much depends on where you happen to be and how bad the global recession has hit. Much may also depend on what if anything governments do to extend or how fast they may decide to contract existing incentive measures that were put in place last year. Some car scrappage schemes are of course already winding down and with governments needing to tighten belts we suspect that apart from in a very few nations, new and additional incentive measures are unlikely to be implemented unless the situation begins to look far worse than we currently imagine. And having discounted car prices just about as far as they probably can over the past few years the carmakers themselves are in an equally difficult position meaning that higher material costs, currency implications and other possible taxes imposed by governments will have to be passed on.

It has of course long been the habit of industry watchers to place great attention on the actual increase or maybe decline in monthly and annual car sales. This is quite understandable as far as it goes of course although equally it may also be fair to say that over too many years perhaps too little attention has been placed on bottom line profits of automakers. Look at it this way: a decline in sales and worse, a decline in market share can only mean one thing – a decline in profits. Despite the best endeavours of some to remove costs and waste margins of carmakers across the piste have, bar a few blips years, continued a long trend in moving downward. To many cars from too many manufacturers chasing the same number of buyers and that is before one takes account of the recession. Too much capacity effectively lying idle in the hope that one day and one new model might just make all the difference! Too many foreign imports from Japan and other areas – a factor that one day will be made a lot worse when Chinese car producers eventually get their export act together. Too much hanging on in hope, failing to realise that, unless you are VW, BMW, Mercedes or maybe Ford, the best days may just lie behind you.

True, although there remains a chance that GM might find a buyer it is just possible that in 2010 we may say goodbye to at least one carmaker in the form of Saab. Even so I suspect that this year will see only around 1% of actual Western European car making capacity removed (more may be assumed if GM take additional measures to cut capacity in Europe earlier than expected). There is in my view no ignoring that there is far too much manufacturing capacity left in the system and that until more bite the bullet and cut back rather than continue waiting in hope for business to come back the number of those making zero or very low returns will continue. How much capacity needs to come out? Given that they almost always appear to be one step ahead of peer volume industry competition on the technology front I am left to anticipate that there is unlikely to be any stopping Japanese carmakers taking additional advantage in Europe. Thus I may, tongue in cheek if necessary, conclude that not until 20% of current existing production capacity is taken out – maybe over the next ten years – will the European volume car industry prosper and thrive. Do I expect that to occur or for there to be consolidation activity that could drive it – to use a favourite expression used by my colleague David Buik, hell has a better chance of freezing over!

To make matters even worse for the outlook of European car makers we also need to remember that year by year they are now increasingly required to endure higher costs pandering to new EU environmental laws plus various national governments requirements aimed at reducing pollution. Of course the overall idea of cutting pollution has to be right and car makers must take their share of the cost along with governments and taxpayers that require such attitude and approach changes. True also that many governments are now offering tax breaks aimed at persuading car buyers to go for less polluting cars but the trouble is that buyers are limited in the amount of choice and remain unconvinced by some of the models and of what they can do. Even so and even accepting that small, fuel efficient models have to be the way forward for now at least and until technology development finally provide us with practical electric or fuel cell powered cars together with the infrastructure required and that really are financially viable for manufacturer and car buyer/user alike European car buyers have shown little willingness to turn their backs on larger [higher margins] yet. The UK has of course been penalising larger and less efficient cars for years in the form of both fuel tax, company car taxes based on engine size and newer forms of pollution tax. Germany continues to debate the issue although currently taxes remain based on CO2 output. Spain raided car buyers a very long time ago whilst France introduced large penalties on big cylinder cars back in January 2008 and the Netherlands added gas guzzler taxes a couple of months later. In Italy the picture is mixed with the government providing incentives to persuade buyers to go for smaller cars that pollute less [benefitting Fiat] whilst at the same time providing wider incentives to encourage buyers out of the woodwork.

Just because European car sales rose in December should not be interpreted as suggesting that following a dramatic improvement on what was after all back in December 2008 just about the worst point of the current cycle that sales through 2010 will continue on the upward trend all year. Clearly given the low level starting point of January last year there will likely be continued improvement in sales for a few more months yet. True also that parts of the Eurozone area are showing signs of renewed growth albeit at fairly low levels meaning at the very least some likely improvement in both consumer and business willingness to buy cars this year. But the bottom line is that Western Europe is a mature market and there are limits to how far sales will grow. Nevertheless, it seems that while some of the very many and varied car scrappage incentive schemes continue across in Europe others have already ended – or will likely do so shortly. For instance, the UK car scrappage scheme that was likely responsible for such a positive turn round in car sales when it was introduced near half way through the year will end late February. The French scrappage scheme continues as far as I know although the German scheme, apparently the largest in Europe and projected to have cost the government EUR2.5bn has unless I have missed something now ended. Given that it seems likely that most governments will probably scale down or end existing car scrappage schemes we should take care not to anticipate European car sales rising beyond.

Finally a quick comment on UK car sales. New car sales in the UK had during the first six months of the years fallen by 26% last year to 322,524 units – a quite horrendous decline and one if not the largest ever recorded in percentage terms. However, on the back of the car scrappage scheme that likely accounted for around 20% of sales last year overall UK car sales during the second half of the year rose by no less than 21% to 185,728 units. Thus the scrappage figures stack up – 20% for scrappage benefit and just 1% for those believing that Britain is well and truly through the recession! In total, UK car sales fell by 6.4% in 2009 to 1.994m units compared to the 2.13m units sold in 2008. With VAT up and with the car scrappage scheme now on its last legs we suspect that car distributors will struggle to achieve 1.75m unit sales this year if they are lucky. There is then little if any light at the end of the tunnel although I suspect that given the extremely low levels of fleet sales over the past two years there will at least be some slight improvement in cars sold for business use.