European automakers race east as emerging market sales surge

It is the emerging markets to the rescue. Carmakers, along with companies in sectors from luxury goods to telecoms, are discovering that having as much business as possible outside the US and western Europe is extremely helpful right now.

The inflationary squeeze is so tight for European carmakers that all are publicly considering price rises because of soaring raw material costs - normally a taboo subject in the fiercely competitive industry.

So the boom in sales in emerging markets is assuming increasing importance for carmakers.

Indeed, China has become so important for Volkswagen (VW), Europe's largest carmaker, that it sold more cars there in the first half than in Germany - a first for the company. "We see a clear split between developed markets and emerging markets," said Detlef Wittig, VW's head of sales.

Sergio Marchionne, Fiat's chief executive, trumpeted a record quarter in Fiat's 100-year-plus history, adding: "Most of this increase comes from Brazil where we had a phenomenal quarter."

Carl-Peter Forster, head of General Motors Europe, one of the continent's biggest carmakers in its own right, contrasted the softness of western European countries such as Spain, Italy and the UK with "an almost overheating economy in Russia."

Nearly all of the big mass-market manufacturers from GM, VW and Renault to Toyota, Ford and Peugeot are investing in Russia - a market that PwC says will this year overtake Germany as the largest in Europe.

Some caution is needed over emerging market prospects. Car and truck manufacturers are starting to see slower growth rates in some eastern European countries such as Poland and the Czech Republic.

However, Hakan Samuelsson, chief executive of German truckmaker MAN, said: "We are seeing a real boom in places like Russia and Kazakhstan. It is true that some countries in eastern Europe are seeing slower economic growth but that is normal as they can't escape the economic cycle entirely."

Leif Ostling, chief executive of rival Swedish truck company Scania, agreed. "Eastern Europe is really driving the growth for us and while there may be bumps we see good long-term growth there," he said.

All that comes against an increasingly gloomy picture for western European manufacturers in their domestic markets as falling consumer sentiment mixes with higher raw material prices to bad effect. Fiat, VW and Peugeot all said they would raise or consider raising their prices this year.

Marchionne said Fiat had increased its car prices by 1.5 per cent in June and further rises were likely.

Hans Dieter Pötsch, VW's chief financial officer, said: "We may have to pass on some of these costs to the customer. We are discussing this at the moment... There seem to be some price hikes in the second half of this year coming to the market."

Forster said GM had already raised prices in the UK because of currency issues and further increases across Europe were likely. "Steel prices are going up, they could cost us a couple of hundred million if we don't find offsets."

Philip Wylie, an investment banker at Houlihan Lokey, said that European carmakers would need to "knuckle down" but added: "Clearly there are a lot of clouds on the economic horizon for carmakers in Europe. But it is not as bad as North America."

- Financial Times