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European Recession Hits Major Car Makers

Sep 14, 2017 in Business

Business Week published an article about the effects of the European financial crisis on April 242013. The author of this article is called David Mc Hugh. In this article, the author explains how the European financial crisis has affected automaker companies operating in Europe. Some of the automakers discussed in the article include Volkswagen, Ford and Daimler. European financial crisis started in 2007. Some of the countries that have been hugely affected by this crisis include Portugal, Spain, Italy and Greece (Hugh, 2013). The governments of these countries faced huge debts during this period. The property market in countries such as Spain crashed because banks offered cheap mortgages to many consumers. Banks were forced to seek bailouts since they had too much debt and they could not finance their normal operations.

Volkswagen, a German car manufacturer, is one of the countries that were largely affected by the financial crisis in Europe. According to Hugh, this company recorded a decline of 38 percent in its first quarter net profits. The profits dropped to $ 2.5 billion. This company manufactures vehicles under brand names such as Porsche, Audi, Seat Brands and Skoda. The senior management team of this company stated that weak demand from the European region caused its first quarter sales to reduce by 1.6 percent (Hugh, 2013). However, its sales in North America and Asia performed well since it recorded positive returns in these regions.

Ford was also largely affected by the financial crisis in Europe. The senior management team of this company revealed that it had lost $462 billion in the European region alone. The managers now consider this region as uncertain since it is difficult to predict the overall performance of this market. Despite of this fact, the global earnings of this company rose by about 16 percent to stand at $1.6 billion. Due to the weak performance in the European region, the management of this company stated that it had plans of closing 3 plants in an attempt of cutting down its losses (Hugh, 2013). This would enable it to bring down its excess manufacturing capacity and reduce its operational overheads. Financial analysts have projected that this company will lose $ 2 billion in 2013.

Peugeot also recorded weak sales in the European region. Financial records of this company reveal that it recorded about 10.3 percent drop in its automobile sales. In 2012, this company lost about 5 billion Euros because of its weak performance in both China and United States (Hugh, 2013). Despite of financial challenges that this company faces, its stock still continues to perform well. Daimler reveals that its market for trucks in the European region would fall by five percent. This is mainly due to the fact that the performance of the European market is very weak. Its Mercedes brand has also been performing poorly

Poor performance of the European region can be attributed by several facts. One of these facts is that the car sales in the European region have been dropping for the last 18 months. This is because of the financial crisis that was caused by huge government debts of the countries in this region. Governments in the European region were forced to raise taxes in an attempt of raising more finances. Money raised from the taxes was to be used to pay off the debt (Hugh, 2013). However, it caused inflation in this region to increase. Moreover, unemployment rate increased. This caused the purchasing power of the consumers in this region to reduce. These consumers could not afford to pay for luxuries. It made them to forego the need of purchasing vehicles. However, some of the automakers are still positive that they will record positive returns from this region.

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