Europe's car sales upturn fails to halt price war

By Laurence Frost

PARIS (Reuters) - Europe's car sales recovery may be taking hold, according to registrations data published on Thursday, but a confidential industry survey shows the pick-up is failing to halt a price war.

Discounts outgrew first-quarter sales, according to the data seen by Reuters, casting doubt on the strength of the recovery and the earnings outlook for carmakers in the region.

Registrations rose 10.4 percent in March, the Association of European Carmakers said, rounding off an 8.1 percent gain for the first three months, after six straight years of contraction.

But average retail incentives jumped 12 percent to almost 2,750 euros (2,260.02 pounds) per vehicle in the five biggest markets, the findings of a major market researcher show.

"There should be significant concern about artificial growth," said Ernst & Young senior automotive partner Peter Fuss, citing discounts, government incentives and cut-price sales of unused vehicles as 'nearly new'.

The industry's bottom line "continues to be under severe pressure", he said. Ernst & Young was not involved in the market research.

PSA Peugeot Citroen saw its European sales volume rise in line with the market last month and for the first quarter overall.

The French carmaker - which disappointed investors this week with a recovery plan targeting a 2 percent operating margin for 2018 - is also among the heaviest price-slashers.

Retail discounts topped 3,000 euros per Peugeot vehicle, according to the survey data, and more than 3,750 per Citroen across Germany, Britain, France, Italy and Spain, where combined registrations grew slightly slower than Europe as a whole.

Mass-market carmakers in the region are still struggling to cover the fixed costs of excess capacity, including unused production lines and underemployed workers.

And while the market is expected to grow about 3 percent in 2014, forecasters say sales are unlikely to return to pre-crisis levels for years. Pricing, as a result, may never be the same.

"In the wake of the 2008 financial crisis, consumers are without a doubt more value-sensitive," said Allan Rushforth, Hyundai's <005380.KS> head of European operations. "For the moment the incentive levels are at an all-time high."

Peugeot's latest 208 subcompact attracts a discount of 17 percent in France - with an old car traded in - and 20 percent at German dealers including online car supermarket Auto Eff Eff.

The same outlet offers Volkswagen's recently revamped Golf compact for about 12 percent off list price in its 1.2-litre Comfortline version.

The VW brand, whose European sales rose 5 percent in March and 4.3 percent for the quarter, saw the biggest increase in retail incentives to nearly 2,400 euros per car - up by one third but still well short of the industry average.

With most at stake in battered southern European markets, Fiat and Peugeot have led the sector's share-price rally this year to post respective gains of 45 percent and 39 percent, fuelled by rebound hopes.

But deepening discounts may give pause to investors who had rushed to play the recovery. Cutting Peugeot to a 'neutral' rating from 'strong buy' on Monday, Erich Hauser of ISI Group said its revival plan relied too heavily on pricing gains.

"Purging the sales force and customers of incentives will take years," the London-based analyst said.

ISI Group nonetheless expects discount levels to stabilize, after a 5 percent March gain in German used-car prices.

"While used-car prices might not be a perfect yardstick for new car pricing, we believe it has predictive value," the brokerage said in a recent note.

No-frills cars powered a 19 percent surge in Renault's quarterly sales, even as France's No.2 carmaker kept own-brand incentives in check at about 2,350 euros per vehicle.

General Motors' Opel division and Ford both slashed more than 3,500 euros off each vehicle on average, while increasing quarterly deliveries.

Ford's European sales grew 14 percent in March and 12.1 percent for the quarter - more than twice the rate at GM, hampered by the Chevrolet brand's withdrawal from the region.

Another German online retailer, Neuwagen Experten Nord, is offering the Ford Fiesta small car for 7,960 euros in its Ambiente version, or about a third off list price. Besides recording the sharpest increase in retail discounts, Europe's largest auto market showed other worrying signs.

According to consulting firm Dataforce, a full 30 percent of German registrations were demonstration vehicles - registered by manufacturers to their own dealers and sold as nearly new, often at a loss.

By comparison, such 'self-registrations' accounted for less than 9 percent of sales in Britain and 14 percent in France.

"Discounts and self-registrations are anticipated to decline only gradually as economic fundamentals improve and normal levels of demand set in," Ernst & Young's Fuss said.

(Additional reporting by Edward Taylor in Frankfurt and Gilles Guillaume in Paris; editing by Erica Billingham and Tom Pfeiffer)