The European auto market is finally stabilizing after five years of steady decline. Yet, unlike the rebound of the U.S. market, the recovery is bound to be slow and prolonged. Hence, car manufacturers such as Fiat (NASDAQOTH: FIATY), Volkswagen (VWAGY -1.11%) and Daimler (MBGA.F -1.05%) will seek to mitigate losses on the old continent by increasing global sales. Thanks largely to their promising growth rates, the U.S. and Chinese auto markets are potential targets for these automakers' efforts.
Strategic Partnerships
The Fiat Group seems to have foreseen the negative impact of the financial crisis of 2008-2009 on the European auto market. By forming an alliance with Chrysler back in 2009, the Italian car manufacturer gained access to the U.S. market. This move forms part of an overall strategy to increment its international presence while widening its portfolio. With a wider range of brands, including several premium ones, the company has multiplied the segments it serves, which reduces its reliance on any single vehicle category.
I believe Fiat's stake in Chrysler will be a key factor in the firm's evolution over the coming years. By gaining access to Fiat's technology and platforms, Chrysler has been able to expand its product offerings and enter the low-emission, small and medium car segment. In addition, the combined company enhanced its international exposure, leading it to expected sales of 2.8 million vehicles in 2014. This means Fiat was able to expand its presence in the U.S., a market from which it was practically absent, while enjoying further gains as Chrysler's product offerings improve.
Fiat's alliance with Chrysler is not the only catalyst worth mentioning. The firm is the market leader in Brazil, with a 23% share, and has a growing presence in developing countries such as Russia, India and China. The company's sales are bound to increase as demand for new vehicles grows in these regions. Fiat's newly achieved global scope will surely mitigate the low level of sales it's achieved in Europe.
At 0.1 times its trailing sales, Fiat trades considerably lower than its peers' average, making this is a stock that buy-and-hold investors ought to consider.
Global Strategy
One of the world's largest car manufacturers, Volkswagen has been pursuing a global strategy for years. Despite economic woes, the firm was actually able to increase revenue in Europe by 5.4% . Nevertheless, North America showed greater growth, with revenue increasing by over 20% in the second quarter . This was mostly attributed to the Porsche brand, but market penetration by Audi and Volkswagen were also significant.
Volkswagen's global automotive strategy will most likely continue to produce positive results. The firm is the market leader in China, with a 15% market share, and is highly active in the North American, Brazilian, Russian and Indian markets. In addition, a rapidly recovering U.S. market and rising demand from developing economies could result in greater sales for Volkswagen.
In addition, the firm's 12 brands offer passenger and commercial vehicles, covering every segment of the automobile industry. For example, the German automaker has achieved a high degree of product differentiation, ranging from high-end luxury vehicles to small fuel efficient cars and even heavy trucks. Volkswagen also has a financial branch that helps increase its sales further.
Volkswagen is currently trading at 0.3 times its trailing sales, a price discount to the industry average of 0.6 times trailing sales. Due to the firm's high degree of financial flexibility, which stems from its substantial cash flow and its increasing revenue, I feel bullish about this stock.
Luxury Vehicles and Cost Reductions
The highly diversified Daimler AG produces everything from small fuel-efficient vehicles, such as the Smart cars, to heavy trucks and luxury vehicles. With its premium brand Mercedes-Benz reporting impressive sales volumes and successful cost cutting initiatives, the firm has achieved large profits. Brand equity is not Daimler's only strong suit. It chose a strategy of geographic expansion to its limit exposure to economic conditions in Europe, where the company makes around 50% of its sales.
Brand equity and new model introduction have spurred sales for Daimler, a trend that's expected to continue for the next few years. Even in times of economic troubles, luxury vehicles tend to fare well, since they are less prone to cyclical downturns. Furthermore, early expansion into the Chinese market has been highly lucrative for Daimler, as it has become the largest S-Class market since 2009.
In addition, the recovery of the U.S. market has produced great results. In 2013, the company posted its highest second-quarter sales in history here, and yearly sales increased 9.3%. There seems to be no end in sight to Daimler's upwards trend in the U.S.
Besides expanding geographically, Daimler has been reducing costs significantly in order to shield itself from the sluggish European market. Common vehicle architecture for cars and a single engine platform for trucks will be key factors in driving down the firm's costs. The only sector where the company will not reduce costs is R&D, where spending averages more than 5% of sales. However, these expenditures are important as Daimler seeks to develop industry leading technology, such as a proprietary lithium-ion battery for hybrid and electric vehicles.
Trading at 0.5 times its sales, Daimler is priced just slightly lower than its peers' average. With no reported debt and revenue on the rise, this may be a stock worth buying while it is still relatively cheap.
Global Expansion is the Remedy
As European-based auto manufacturers seek to shield themselves from the negative effects of a stagnant regional economy, global diversification seems to be the key to their success. Fiat's incursion into the U.S. market seems likely to produce great profits in the near future. Meanwhile, Volkswagen and Daimler, who have been globally active for years, have much to gain from further penetration into North America, as well as developing markets such as China.
