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Strong Euro slashes carmakers' profits

Vehicle manufacturers are warning they will be forced to cut volumes and raise new car prices in the UK and mainland Europe to help offset the impact of the strong Euro. They blame exchange rate fluctuations and shrinking new car demand for a downturn in profits.

Disappointing first-half results from DaimlerChrysler, Volkswagen, PSA Peugeot-Citroen and Renault means fewer new cars could be exported to Britain, where prices are falling, to help bolster margins. PSA Peugeot-Citroen says net income has fallen by 11.7 per cent to £613m with the Euro imbalance taking £206m of the company's profit.

Chief executive Jean-Martin Foltz says exchange rates differences will prevent the French carmaker from hitting its full year targets and force it to cut operating margins from 5.2 per cent to 3.7 per cent. He says PSA has already dropped less profitable fleet customers in the UK and is reducing production in a bid to cut sales, despite the threat of losing market share. The move specifically impacts sales of the Ryton-built 206 and 206SW with production reduced from 198,000 cars a year to 180,000.

The UK market is slightly down, but it is still expected to be the third best year on record, while new car sales in Europe have stalled. Garel Rhys, of Cardiff Business School, says carmakers are using the strong Euro as an excuse to increase UK car prices. He suggests retailers could be forced to sacrifice their margins on discounts to keep transaction prices low and secure volumes. “It is realistic pricing that has made the UK such a strong market,” he says.

Domestic rival Renault is also blaming the Euro for forcing it to lower its profit margins from four per cent to 3.5 per cent as operating profit fell 35.5 per cent to £415m in the first half of 2003.

Volkswagen saw its core profits halved in the second quarter because of the strong Euro combined with development costs. As a result the carmaker's operating profits fell to £435m from £0.9bn a year ago with pre-tax profits dropping 46 per cent to £479m.

Chief executive Bernd Pischets-rieder says the exchange rate is unfavourable and expects the problem to continue into next year. DaimlerChrylser, the world's fifth biggest carmaker, saw operating profits fall 62 per cent to £452m.

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