'Robust sales are putting the UK in danger of becoming the 'treasure island' of Europe again for carmakers – this time not because prices are higher than the mainland, but because markets with a strong manufacturing base, such as Germany and France, are underperforming.

For Volkswagen, BMW and Mercedes-Benz, slow sales in their home markets are forcing executives to put pressure on the stronger markets, like the UK, to absorb surplus capacity. For BMW, for instance, Britain was a real hotspot in 2003 – sales rose year-on-year by 9.65% to 93,822 and the 3-series was a top 10 car, beating fleet staples like the Ford Mondeo. At 3.25m, last year's sales in Germany compare poorly with 1999, when they topped 4.1m. Likewise, France dropped from 2.6m sales in 1999 to little over 2m last year.

BMW's and Mercedes' strength in the UK does raise some questions, mainly over residual values, particularly for the 3-series which sold 65,489 units. However, BMW executives say they can see no reason to curb sales here. They remain confident that BMW's powerful brand image as a supplier of high quality, premium cars, will ensure new and used demand remains greater than supply, almost irrespective of the volumes involved. Residuals, they say, will not tumble. Others aren't so sure.

New car prices in the UK have stabilised after three years of steady decline, and in some cases they are on the increase – and that's already prompted protests from the Consumers' Association, which never fully accepted the contention that UK prices had fallen in line with the rest of Europe. But any slump in demand caused by a natural drop-off or prompted by a negative media campaign, would be devastating. Surplus volume would force carmakers to flood the market with discounted cars, and that would certainly have an impact of residuals.

The SMMT predicts that won't happen this year – it's forecasting 2.5m sales, a small dip on last year's record 2.58m – but the question for the German carmakers is: can they continue to sustain their growth?

There are reasons to believe they can. Premium brands have been squeezing volume D-segment models for the past couple of years as lower prices match buyers' incomes to their aspirations. This sector is also being squeezed by smaller cars as some consumers look to downsize. Here, too, the premium carmakers are looking to stake a claim – BMW with the forthcoming 1-series (not to mention Mini), Mercedes with the A-class.

So what's the future for the German market? There has been a modest improvement in sales recently, but this is not enough to disguise the massive underperformance of Europe's largest car market. While consumer confidence remains low, the prospects for growth are low.'