Operating Profits Lag in Europe for Mainstream Producers

Europe’s luxury brands are enjoying strong margins in Europe. But not so for the region’s main-market marques, many of which continue to barely break even.

An analysis by The Wall Street Journal blames strong competition and virtually zero profits at the bottom end of the mass market, which generates most of the region’s sales volume.

Greater tax rates also have kept European fuel prices relatively high in spite of plummeting oil prices, thus damping demand for highly profitable SUVs and crossover vehicles. The Journal says net fuel costs have dropped 18% in Europe in the past two years compared with twice that rate in the U.S.

Volkswagen AG illustrates the profit gap for mass-market models. In the first three quarters of 2015, the operating return on sales before special items for the group’s Audi and Porsche luxury marques was more than 9% and nearly 16%, respectively. The margin on the groups VW brand was less than 3%.

Similarly, Ford and Fiat Chrysler Automobiles each eked out 1% operating profit margins in Europe last year. General Motors posted its 17th annual loss in the region. All three enjoy margins of at least 6% in the U.S., where cheap fuel results in a richer sales mix.

There are exceptions. The Journal notes that massive cost-cutting at Groupe PSA last year reversed five years of net losses with a 5% operating profit.

LMC Automotive estimates the European auto industry’s factories are still running at only about 60% capacity in small-car-oriented France and Italy. That compares with 89% in Germany, where luxury brands dominate. The Journal warns of continued pressure this year, when sales growth in Europe is expected to slow to 4% from nearly 10% in 2015.