New models failed to offset soaring raw material prices and price competition at PSA Peugeot Citroen, where net profits fell by a fifth in the first half of the year.
Europe's second-biggest carmaker said net earnings for the six months to 30 June fell to 681 million euros (£473 million), well below an average forecast by analysts of 781 million euros (£542 million).
Chief executive Jean-Martin Folz said PSA was ceding market share by offering big discounts in markets such as Britain, Germany and Italy but was defending its bottom line.
PSA's first-half operating margin slipped to 4.1 per cent from 4.5 per cent last year, but remained within its full-year 2005 target range of 4-4.5 per cent. Mr Folz yesterday maintained his forecast that higher raw material costs, especially steel, would have a negative impact of 250-300 million euros (£174-£208 million) in the full year and take an unspecified toll again in 2006.
PSA has multi-year contracts with its main steel suppliers, such as Corus, Arcelor and Mittal, that run until the end of this year and the company needs to renegotiate the supply deals.
"It is obviously too early to make any forecast about the impact but for sure there will some further impact from raw materials next year because we don't expect to have the same sort of prices as what went on before," said Mr Folz.
Analysts were relieved PSA kept its targets. They forecast sales would pick up in the second half and saw some upside in the company's shares.
PSA said sales picked up in the second quarter and the impact of new models would accelerate in the second half. Unit sales edged up 0.6 per cent in the first half despite a weak showing in western Europe.
"However, lacklustre growth in European economies means that the region's automobile markets are not likely to see a significant upturn," PSA said, adding group sales growth would depend on expanding markets outside Europe.