Fitch Ratings says continuous robust new cars sales growth in several emerging markets, including Russia, India, China, Brazil (BRIC countries) and Argentina, mitigates poor demand in European manufacturers' domestic markets. Together with the rapid development of low-cost cars, the major move of car manufacturers to emerging regions is one of the main trends in the auto industry.

"The enormous potential for new vehicle sales in emerging regions has been a major driver in the strategy of European manufacturers in recent years," says Emmanuel Bulle, Senior Director in Fitch's European Corporates group. "They are increasingly looking to diversify revenues outside of their home market by signing alliances, opening plants and developing their sales networks in the BRIC and other emerging countries."

Renault's ('BBB+'/Stable Outlook) European unit sales were down 4.1% in 2007 and 0.2% in Q108. By contrast, its sales outside Europe increased 16.3% and 22.1%, respectively as the group made substantial progress in Latin America, driven by Brazil (up 56% in 2007) and Argentina (16%). Fitch expects further growth in 2008 as the company rolls out the Sandero and other Logan models. Similarly, Volkswagen Group ('A-' (A minus)/'F2'/Rating Watch Negative), Peugeot SA ('A-' (A minus)/'F2'/ Stable Outlook) and Fiat SpA ('BBB-'(BBB minus)/'F3'/Stable Outlook) reported Q108 sales were down 0.7%, 0.9% and 5.3%, respectively, in Western Europe but up 17%, 14.3% and 0.2% outside of the region.

According to most industry research, resource-rich Russia is set to become the largest car market in Europe by 2010 as it benefits from the energy boom. Unit sales grew more than 140% in the past five years and are forecast to grow by a further 60% through to 2010. Importantly, most new car sales are captured by non-Russian companies as domestic manufacturers' market share fell to 27% in 2007 from 70% in 2002. In China, India and Brazil, new car sales grew 22%, 9% and 24%, respectively, in 2007 and continued unabated in Q108.

"Although the strategy to look for growth in emerging markets has largely paid off in recent years and should remain profitable in the long run, a prolonged or accelerated sales decline in western Europe may still ultimately weaken the credit profiles of car manufacturers," says Mr Bulle.

Developed regions still represent the majority of European manufacturers' sales (about 85% of sales for premium manufacturers and 65% for volume car makers). In addition, Fitch cautions that emerging markets already see rising competition as their major growth potential draws nearly all manufacturers in. Volkswagen's market share in China fell to 18% in 2007 from more than 50% in 2001 amid growing competition from local manufacturers and new entrants. Importantly, average profitability in most emerging markets is also still usually lower than in developed regions.

Emerging markets are also more volatile and car sales may fall abruptly in an economic slowdown. For instance, the US economic slowdown can have negative repercussions on several South American countries, including Brazil and Argentina. In Russia, the economy is highly dependent on the oil sector and falling oil prices may have a negative impact on car sales. Fitch has warned in its semi-annual Sovereign Review published on 26 June 2008 that the economic and credit outlook for emerging market economies is deteriorating after a period of rapid and solid growth, driven primarily by rapidly rising inflation.

Nonetheless, Fitch believes vehicle sales growth in Russia, China and India will remain robust, given the extremely low number of vehicles per inhabitant compared to other large countries and the emergence of the middle class-consumer.

European auto manufacturers have been boosting sales and production outside Europe in recent years. Fitch will look at the production aspect of European auto makers' foray into emerging markets in the second part of its comment in H208.