Volkswagen warns of shrinking car market

VOLKSWAGEN YESTERDAY sounded a warning bell over the recovery prospects for the motor industry as Europe’s largest car-maker warned that the global car market could shrink in the second half of this year.

Christian Klingler, VW’s executive board member and head of sales, cautioned of a bumpy road ahead after the car-maker’s July sales growth considerably slowed down.

“Now that incentive programmes have come to an end the global automotive market is expected to decline in the second half of the year,” Mr Klingler said in a warning that took even close market observers by surprise.

While it is common sense among analysts and car executives that growth will slow in the second half of the year, most do not forecast vehicle sales to fall.

“We expect global sales to remain just above the level seen in the second half of 2009,” said Christoph Stürmer, analyst at IHS Global Insight.

However, he added that production levels would drop significantly as many mass market car-makers had ramped up their plant output too fast in the first six months.

“It was about time that someone came out with a warning as the car industry has become overly euphoric,” Mr Stürmer said. “This will lead to a pricing battle in the remainder of the year.”

Global car-makers have been basking in a rapid sales recovery in the first half of the year which helped many return to profits and revenue growth after last year’s economic crisis. However, as state-sponsored scrappage incentives run out and austerity measures kick in all over the continent, IHS Global Insight forecasts western European car sales to fall by 1.1 million units to 5.5 million vehicles year-on-year in the second half.

Car sales in the US and China, the main demand drivers in the first six months, are still growing but have been losing steam rapidly in the past few months.

VW’s July sales highlighted how the car market recovery is rapidly losing traction. In the past month the multi-branded car-maker’s deliveries grew by 2.9 per cent to 572,200 cars. This marked a steady decline from the growth rates of 5.7 per cent in June and 8.6 per cent in May.

Due to a much faster upswing in the first quarter of the year, VW’s sales are still up by 13.7 per cent in the first seven months. – (Copyright The Financial Times Limited 2010)