Accounting analysis and valuation methods of Renault

The year 2008 is a year of risk for the automotive sector with a macroeconomic environment that is deteriorating gradually. In Europe, the sales were facilitated by the new EU member and a base effect in Germany on assumptions of modest growth in Europe. It was accompanied by the risk of spreading a possible recession in the U.S. economy. We presented a hypothesis of auto sales in 2008 instead of an initial forecast of 2% growth.

After rising to 0.2% in 2007 (+1.1% including the new members of the European Union), we expected a decline of 1.4% in Western Europe and -0.9% with the new members. This prediction was consistent with economic growth revised gradually by SG Economic research from 1.6% to 1.3% for the euro area and by 2.2% to 1.7% for the United Kingdom. Among the technical, fiscal measures to promote cleaner vehicles in France, Spain, and Italy, it also provided support to the demand for small cars and, ultimately, to the European market as a whole.

In France, demand took advantage of the small and scrapping rating system introduced by the government. Growth was estimated at only 1.5%, so that it could reflect the economic environment. A risk factor on the prediction was the surprise increase of 20% of registrations in December 2007, in anticipation of penalties imposed on certain types of vehicles and which affected the figures in January, while the comparison was negative in the month of December.

We expected, however, a decline of more than 6% in Spain and 5% in the UK. Although the final months of 2007 did not show any marked reversals it was still a huge risk because of lower property prices and deterioration related to consumer confidence. Changes in interest rates in the UK, however, were a positive factor if a drop occurred. We also expected a further growth (+6.5%) of the newly members of the European Union through the development of the rate of car ownership.

Even if there was propagation of a global crisis in these countries, we believe that the movement initiated by the inevitable development of trade relations with major countries and the progressive enrichment of the population would support long-term demand. In addition, the expected increase for 2009 and 2010 was 0.9%and 1.7% for Western Europe by building on a return to higher economic growth.

Our forecasts were based on the downward revision of growth in 2008 by SG Economic Research from 2.6% to 1.2%, with a high level of risk, particularly on consumption, because of the housing crisis. We retain the assumption of a market down of 5.9%, to 15.2 million units instead of a 3% decline earlier. It was located at the bottom of the estimation of Nissan (15.5 million units to 16 million) and the figures announced by U.S. automakers and Toyota relied on sales that were slightly down around 15.8 million units, against16.2 million in 2007 with a decrease in S1 followed by a rebound at the end of the year.

Tags: Automotive sector, macroeconomic environment, European market, rating system, economic environment, lower property prices, global crisis.