Spaniards abandon luxury auto dreams in post-crisis pragmatism

Staff Writer
Columbus CEO

(c) 2013, Bloomberg News.

MADRID — When Hugo Ramos was a teenager in La Coruna in northwest Spain, he dreamed of a good job, his own apartment and a flashy car. After a two-year recession in the country, those goals have been scaled back.

"I wish I could buy a Porsche, but for that I would need a full-time job and that's not going to happen anytime soon," said Ramos, 21, an unemployed mechanic who works odd jobs like delivering pizzas, lives with his parents and drives a two- decade-old Seat Cordoba sedan.

Like others in his country, Ramos is adjusting to the sober prospects in post-crisis Spain with a new pragmatism. Instead of a Porsche, he's saving for a more affordable new car from General Motors Co.'s Opel or Volkswagen AG's Seat. He plans to pay cash to avoid taking on the kind of debt that allowed young people in the past to buy expensive cars and led to the country's downturn.

The hesitation by Ramos and other consumers to spend has held back Spain's recovery. Growth of 0.1 percent in the third quarter marked the first rise in Europe's fourth-largest economy since March 2011. The deepest budget cuts since Spain's return to democracy in 1978 means exports are leading the rebound.

To kick-start consumer spending, the government is offering incentives of 1,000 euros ($1,340) on the purchase of a new car costing 25,000 euros or less, as long as carmakers provide matching rebates. The latest cash-for-clunkers program, the fourth this year, has a budget of 70 million euros. In total, the government has set aside 365 million euros to prop up auto sales, which have fallen 56 percent since the financial crunch in 2008.

The efforts have started to pay off. Registrations surged 34 percent last month as smaller cars gained in popularity, helping lift the European auto market to a second consecutive monthly rise for the first time since 2011.

Spanish deliveries of subcompacts like the VW Polo, Seat Ibiza, and Opel Corsa are forecast to jump 17 percent this year, triple the marketwide gain of 5.3 percent, according to data from IHS Automotive. By contrast, sales of mid- and full-sized cars will likely tumble 15 percent.

Spain was once a hot spot for luxury-car sales as loose credit fueled demand for models like Bayerische Motoren Werke AG's 3-Series sedan and the Porsche Cayenne sport-utility vehicle. BMW's deliveries have fallen 57 percent in Spain since 2007, when it was one of the 10 best-selling brands. It's since been replaced in the ranking by Nissan Motor Co., according to data from the country's auto association Anfac.

"Times of cheap money are over and households that bought whatever they wanted won't do so again," said Marc Sachon, a professor at IESE Business School in Barcelona. "People will turn to smaller, more affordable cars."

The total share of small cars, including compacts like the VW Golf, is forecast to account for 87 percent of Spanish vehicle sales this year, compared with 77 percent before the crisis, according to industry consultancy IHS. Mid- and full- sized cars will likely account for just 13 percent of the market, compared with 23 percent in 2007.

The downmarket shift has meant a rare boon for volume carmakers in a country where sales have fallen more than half from their peak.

"We reached a turning point" with the help of the incentive programs, said Felipe Guija, sales manager for Opel in Spain. The government's car subsidies "will continue to be key in 2014 as a way to help consumers renew their cars and keep up demand, which remains sluggish."

A more stable turnaround is unlikely until Spain's 26.6 percent unemployment rate — the second-highest in the European Union after Greece — starts to improve as people get jobs.

"I'm still quite skeptical about any serious recovery in Spain at the moment," said Jonathon Poskitt, an analyst with LMC Automotive in Oxford, England. "We probably won't see any substantial growth in the next 12 months."

Budget Minister Cristobal Montoro said on Nov. 6 that he expects companies to create new jobs beginning in early 2014. There have been some tentative signs of progress. Adecco SA, the world's largest provider of temporary workers, this month said third-quarter profit rose 61 percent boosted in part by a rebound in Spain.

Job growth could unleash a wave of pent-up demand, as consumers with aging cars like Ramos get the confidence to spend. Spanish vehicles are 10.3 years old on average, almost two years older than elsewhere in the EU, according to Anfac.

"New car sales will outstrip the economic growth rate," business professor Sachon said. "People have been waiting to see some kind of a recovery."