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Old September 13th, 2001, 03:45 PM   #1
Magic Mtn Dan
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German carmakers face bumpy ride after U.S. attacks

German carmakers face bumpy ride after U.S. attacks

By Madeline Chambers

FRANKFURT, Sept 13 (Reuters) - German car makers had hoped this week's Frankfurt motor show would revive flagging domestic demand but now they face a slump in their key export market following the terror attacks on the United States, auto experts said.

A possible crumbling of U.S. consumer confidence, the single factor which many experts say has kept recession away, combined with higher crude oil prices and a weaker dollar against the euro could spell deeper gloom for the German companies.

German carmakers have this year been relying on strong exports, especially to the United States, to offset weak demand at home and to support profits.

"The sector has been slammed," said a London-based analyst on Thursday.

The U.S. accounts for at least 20 percent of all German carmakers' sales and a greater proportion of their profits, which have also been helped to some extent in the last year at least by a favourable euro-dollar exchange rage.

German auto stocks have tumbled in the last three days along with stocks globally.

The biggest losers were sportscar maker Porsche, plunging almost 20 percent to a 13-month low on Wednesday, and DaimlerChrysler, most exposed to the U.S. market via its loss-making Chrysler unit, which plummeted to a 5-1/2 year low of 37.77 euros.

The carmakers, which together have a market share of about nine percent in the United States, kept mum this week, saying it was still too early to assess the impact on business.

RECESSION?

The biggest worry is that U.S. consumer confidence will decline, sparking a recession in the United States that could spread and further dampen auto demand.

Until now most experts expected a decline in U.S. light vehicles sales of up to around eight percent.

"There is a fear that this is the nail in the coffin for U.S. consumer confidence," said one analyst.

"As I see it, the danger of recession has increased and the good position of the Germans will not continue," said one German-based analyst.

BMW and Volkswagen VW have this year impressed investors with strong U.S. sales. In August, VW and BMW both posted a 13 percent rise in August sales in the U.S. while U.S. makers' sales fell.

Experts said they had been protected by their luxury vehicles which are less exposed to fluctuations in auto demand than mass produced cars.

However, some analysts say Porsche and BMW may be hit hardest because a large part of their customer base is in the investment banking community and sales depend partly on bonuses, which may not be forthcoming this year.

"The luxury cars that the Germans have succeeded in selling in the U.S. may not do as well now as they are related to a "feel good" factor which people are not going to have," said Garel Rhys, a professor of automotive studies at Cardiff University.

He thought the effects may start to show within a couple of months if customers started to cancel orders, but others said the reaction might be delayed until 2002.

"Orders for August are still strong and it will take time for them to feed through," he said.

Another worry is the effect of higher fuel prices on demand.

Front-month Brent crude prices spiked higher to $31 on Tuesday and have since settled around $27-28.

"There is a very strong correlation between oil prices and demand for cars," said one analyst.

German carmakers may be forced to cut production to counter the effect of dampened demand, said anlaysts.

"I think we might see a reduction in production levels and that the Germans will reassess their capacity utilisation but I don't think we will get actual capacity cuts," said Rhys.

"BMW and Porsche are running at full capacity anyway - at worst they might have to cut back to around 95 percent and that is not too serious," said one analyst.

BMW's U.S. plant which produces its X5 sports utility vehicle is raising capacity this year to prevent bottlenecks.

DaimlerChrysler's Chrysler unit is already under pressure due to the increasing success of foreign carmakers. It is in the midst of a $4 billion restructuring plan aimed at returning it to profit in 2002.

"This intensifies its problems, but the fundamentals haven't changed as much for Chrysler," said Rhys.

PROFIT WARNINGS?

"The fall in production will be magnified in profits," said Rhys, who thought that of the Germans, Porsche, which sells half its cars in the United States, would be affected most.

An appreciation of the euro against the dollar would also eat into profit, said analysts, although hedging would limit the impact.

BMW and Porsche have very cautious hedging policies while Chrysler would benefit from a weaker dollar. Volkswagen, with a less conservative approach, stands to lose most.

VW Chief Executive Ferdinand Piech told Reuters earlier in the week that the first call he made after the terror attacks was to increase VW's hedging.
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Old September 13th, 2001, 04:48 PM   #2
Eric (NC)
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Looks more like a buying opportunity...

As most savvy investment advisors will say, this is a time for careful moves. Watching strong performing companies that have the backbone to get through times like this tumble is very tough, but it does provide opportunity to buy into those well-run, well-established market leaders.

No investment advice here, but just my thoughts.

Be well.
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