Euro zone opens route for investors into the major league of car manufacturers

Like many other small states, the Republic does not have its own car manufacturer.

The closest Irish buyers came to a domestic car company was through the US manufacturer, Ford, which had operations in Cork for many years, while German group Opel has also won a place in the nation's heart through its sponsorship of the Irish soccer team.

But the introduction of the single currency means all car manufacturers located in the euro zone are local from an investor's point of view. Although General Motors and Ford, the two largest car manufacturers in the world, are both American, a number of European companies are now serious players on the world stage and possible bluechip investment options for Irish investors.

Last year's merger of Daimler-Benz, which includes Mercedes among its brands, and the US Chrysler corp, created the third biggest carmaker in the world in terms of market capitalisation. Other large European players include the German companies, Volkswagen and BMW, the French auto-makers Renault and Peugeot-Citroen and Italy's Fiat.

Like many other sectors, the car industry worldwide is undergoing a profound structural change. A number of shares in the sector rose sharply in the early days of January, fuelled by rumours that industry giants like Ford was in the market for acquisitions.

The rumour was borne out yesterday when Ford announced an agreement to buy the worldwide passenger car operations of AB Volvo. The announcement, made jointly in Stockholm and Detroit, ended weeks of speculation about a merger partner for the Swedish automaker which had appointed a leading US investment bank to explore the sale of its car division. Fiat and General Motors are reported to have made rival offers.

Meantime, the struggling Japanese carmaker, Nissan, has clearly signalled that it is looking for a partner and has held talks with both Renault and Daimler-Chrysler.

But if it is still unclear which firms will end up together, most analysts are agreed that the sector is set for further consolidation in the months and years ahead.

The number of independent car manufacturers has slumped from 52 in 1964 to 18 today and industry experts estimate that the number of global auto-industry players could eventually shrink to single digits. And the odds are on certain European players like Daimler-Chrysler and Volkswagen to stay the course.

"The general view is that as we move into the next decade there will be four or five colossuses who stride the world and are interregional players," says Mr John Lawson, autoindustry analyst at Salomon Smith Barney in London.

Already, famous British marques likes Bentley, Rolls Royce and Rover have ceased to exist as independent companies, are subsumed into the operations of firms like Volkswagen or BMW.

The Daimler-Chrysler merger was particularly significant as it showed that nationalistic and cultural considerations were not insurmountable obstacles to car company mergers, a view that took hold in Europe after the collapse of a planned Renault-Volvo alliance five years ago.

Consolidation, if it succeeds in driving up shares prices and delivering synergies, should be good news for shareholders. But the industry faces a number of more immediate challenges in the meantime.

The slowdown in Asia, and its knock-on effect in Latin America, has been bad news for the motor industry globally. However, analysts say that European players have less exposure to these regions than their Japanese or US rivals.

Fiat, however, is one exception as the Latin American market accounts for some 12 per cent of sales, a factor that could hold back the Italian car manufacturer this year. The area is also important for Volkswagen.

But most analysts expect demand in the important west European and North American markets, the key volume determinants for the auto industry, to remain broadly stable in 1999. Morgan Stanley is forecasting sales of 14.1 million units in western Europe this year, down slightly on last year's figure of 14.3 million, while Dresdner Kleinwort Benson is expecting a slight increase.

However, some European markets are expected to perform better than others. While the large markets of Germany, France and Spain are expected to remain healthy, Britain and Italy, where a government-sponsored car incentive programme ended last year, could show signs of slowing.

Fiat, already facing trouble in Latin America, seems set to suffer if there is a slowdown in Italy while BMW is among the European stocks most exposed to the British market, through its loss-making Rover subsidiary. Meanwhile, if forecasts are correct, Renault should benefit from good conditions in France, where it is the market leader, and in Spain, where it has significant market share.

Despite the generally healthy outlook for the auto sector, views remain mixed on its attractiveness to investors at present. Some analysts argue that auto stocks generally are not cheap and prefer the car components sector.

Mr Greg Melich, auto analyst with Morgan Stanley Dean Witter, cites shares such as French auto parts manufacturer Valeo or the tyre manufacturers Michelin and Continental - which employs 180 people in Ireland through its Semperit subsidiary (in marketing, and in retail through Advance Tyre) - as offering better value than some of the auto manufacturers and more likely to weather any downturn.

However, other analysts believe European auto shares should do well compared to other stocks in the capital goods sector as they are less exposed to the Asian downturn. But much depends on the particular stock and its strategic positioning in a cyclical industry, they say.

"What you have to look at is the company's long-term strategic positioning," says Mr Martin Ziegenbalg, analyst with Dresdner Kleinwort Benson. "At some point there will be a downturn in Europe and the companies best placed for that are those with a geographical balance to counter the cyclical effects in one regional area," he says. As a result, he favours Daimler-Chrysler and Volkswagen, both of which have a strong global presence and enjoy significant economies of scale.