Export to Europe!

Europe should be your main target market for parts exports. Here is why.

I just returned from a trip to Europe. What a difference it was from traveling to the USA. In the USA, all you see is sad faces, if you see any faces at all: Many companies, from small dealers to large parts companies, have closed.

In Europe, you see happy faces and sad faces, depending on where you look and who you are talking to.

In terms of auto sales, Europe as a whole appears to have turned the corner. For the month of June, Europe recorded a modest growth of 2.4 percent, mostly “carried by the effects of fleet renewal schemes in more than 10 EU Member States.”

“Fleet renewal schemes” is a EUphemism for cash for clunkers. In many countries in Europe, the government gives money to people who retire their old car and buy new. Germany gives 2500 Euros to its citizens. This huge stimulus boosted Germany’s sales. Twice in a row, Germany registered increases of 40 percent over the same month in the prior year. Instead of 3 million cars last year, Germany expects to sell anywhere between 3.6 million and 3.8 million new cars this year.

The big winners in Europe’s turn-around are the Volkswagen Group (+9.5 percent), Fiat (+11.7 percent), and Hyundai (+27.1 percent). In terms of market share, the Volkswagen Group dominates Europe with 21.4 percent share, followed by PSA (13.1 percent), Ford (10 percent), GM Group (9.1percent), and Fiat (8.6 percent). Volkswagen and Fiat are expected to gain market share, GM Group is expected to lose.

Not all is rosy in Europe. Germany for instance usually exports half of the cars it makes. Europe’s car manufacturers are hurt by the worldwide sales slump. In the first quarter of 2009, Europe’s car production was down by 35 percent.

In the after sales field, Europe is buffeted by good news and bad news. Drops in sales of new cars usually result in increased after sales, as customers have their cars repaired instead of buying new ones. The cash for clunker schemes resulted in the sudden retirement of older cars. This affects mostly small cars. Many parts in these cars are being recycled, remanufactured, or sold used.

Overstocks from OEM production, or from bankruptcy sales, are disrupting the market. Car manufacturers react and drastically slash the prices of certain commodity parts (the ones which are exposed to cutthroat competition.) Sometimes, dealers who buy 10 pieces, get 4 pieces free. Certain parts which are under competitive pressure are sold to dealers at 15 percent to 25 percent of list. We have seen some parts which are sold from European wholesalers to dealers at prices which are below ex works prices in China.

This is by no means an indication that China has lost its price competitiveness. For new production, the Chinese manufacturer still underbids his European competition by a high margin. However, the European market is distorted by changing supply and demand in certain car segments, by overstock and distressed merchandise. If you want to survive in this market, you need to adjust your prices to the market, or you will fail.

Also, currencies are still fluctuating wildly. Poland has a vibrant parts industry. In February, one Euro bought 4.9 Polish Zloty, making a Polish part very competitive in Euros. Last week, one Euro bought only 4.2 Polish Zloty, making the Polish part more expensive in Euro terms. In the meantime, the Euro appreciated against the Yuan. As this was written, one Euro bought nearly 9.72 Yuan, one of the most advantageous rates (in the eyes of the exporter to Europe) in a long time.

In this situation, receiving precise and timely market data, segment by segment, country by country, parts group by parts group, decides over success of failure. High volume wear parts can become a hazardous field as companies fight for survival. Specialty parts which fly below the RADAR screen can get very interesting. Europe consists of many markets, many economies, some good, some bad. You will only get good grades in Europe if you do your homework.

Here is the bottom line: What I have seen on my trip to Europe largely reflects Gasgoo’s excellent Research Report on the Change in Global Auto Industry. The U.S. auto industry is hurt; it will take a long time to recover. Japanese carmakers are injured by the sales implosion in the US and by a deteriorating home market. European makers, especially Volkswagen and Fiat, benefit. The after sales market in Europe has pockets of severe market distortions, due to overstock, distressed merchandise, scrapping schemes, and shifts between segments. It has other pockets of huge growth.

These distortions usually have a short lifespan. European parts makers go bankrupt, their stock is sold off at auction, then, suddenly, their production capacity is missing also. Once distressed merchandise is sold off, prices will rise. With competitive pressure easing, European OEMs will stop their discounting. While the Yuan is frozen against the US Dollar, the Euro is going up against the Yuan, making Chinese products even more competitive in Europe.

Lastly, there is an increasing danger of protectionism in the US market. The proposed higher tariffs on Chinese tires are only one example. The wounded tiger shows his teeth, his bite can be painful. Europe on the other hand, especially Germany, is registering rising exports to China. Like China, Europe is interested in peaceful business, not in trade wars.

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About the author: Bertel Schmitt, Gasgoo's columnist, is CEO of Hong Kong based parts sourcing company Sinamotive. Before founding Sinamotive, with the assistance of U.S. venture capital, Mr. Schmitt was a marketing consultant to Volkswagen AG.