By Edward Taylor and Laurence Frost
FRANKFURT (Reuters) - Flush with cash and confidence after years of rising sales, German carmakers are used to reaping industry-leading returns. But with Chinese demand abruptly slowing, the profit engine has begun to sputter, overshadowing the glitz of the Frankfurt auto show which opens on Tuesday.
For the home team of BMW, Daimler and Volkswagen (XETRA:VOWG), as well as European rivals such as PSA Peugeot Citroen, China's downturn also threatens to weigh on already weak emerging markets and put a damper on recovering demand at home.
"Auto sector earnings have peaked," Bernstein analyst Max Warburton warned investors on Friday, noting the broad array of new German luxury models about to be unveiled in Frankfurt - and aimed squarely at the world's biggest auto market.
"Go see these products while you can," he said. "Few would even exist if it weren't for China."
Days before the show, IHS Automotive cut its full-year Chinese market forecast by 700,000 vehicles, from 4.4 percent to 1.4 percent growth. For 2015-17 the shortfall totals 3.6 million cars and light trucks.
Besides marking the likely end of a stellar run of earnings, the 118-year-old industry gathering will show evidence of a deeper shift that is pitting carmakers against technology players, often backed by big suppliers such as Bosch.
"For us, new market entrants are customers just like the established carmakers," said Bosch mobility solutions chief Rolf Bulander. He cited Google (NASDAQ:GOOGL) and electric carmaker Tesla among clients for the company's high-tech driver assistance, powertrain and sensor systems.
Some of the newer automotive players may not succeed, Bulander predicted, "but others will establish themselves".
HORSEPOWER TO TERABYTES
German carmakers are attempting to riposte with their own technology and with electric rivals to Tesla. Horsepower bragging rights have given way to software terabytes, autonomous driving capabilities and battery watt-hours per kilogram.
An electric Porsche will vie for attention at the show with a battery-powered SUV from Volkswagen Group stablemate Audi, BMW plug-in hybrids and Mercedes-Benz smartphone apps.
While VW, BMW and Daimler, which owns Mercedes-Benz, have relied on China for 30-50 percent of their profits in recent years, they have yet to trim earnings guidance.
Others are sounding circumspect. France's Peugeot, which was counting on Chinese sales to power its recovery plan, said in July that the strategy was under review. Domestic rival Renault (PARIS:RENA) is also watching closely as it prepares to open its first Chinese plant later this year.
In Frankfurt, the German-owned premium and ultra-luxury brands are partying like there's no tomorrow, rolling out new offerings such as the Mercedes-Benz S-Class convertible, Rolls-Royce (LONDON:RR) Dawn cabriolet and the Bentayga, Bentley's first SUV.
To accommodate their expanded lineups, show stands have morphed into theme parks. BMW has built a 400-metre racetrack, while Audi's three-storey effort includes 700 square metres of LED panels, 200 km of cabling and space for 33 cars.
The exuberance may continue awhile longer, but analysts believe reality is about to catch up with the revellers.
"The end of the global auto cycle is nigh," said Stuart Pearson (LONDON:PSON) of Exane BNP Paribas (PARIS:BNPP), as he cut his VW rating to "neutral" from "outperform" on Thursday.
Overspill from weaker-than-expected exports to China may soon saturate a U.S. premium market approaching its peak, Pearson cautioned, hitting prices and profits.
"What China has started, North America may finish," he said. "Investors should look to sell into the final flourish of the cycle in 2016."