European Auto Industry Faces Turbulent Times Amid Profit Warnings and Trade Tensions
In recent weeks, major players in the European automotive industry, including Stellantis, Volkswagen, BMW, and Mercedes, have issued alarming profit warnings. The challenges they face are increasingly daunting as demand for vehicles in China weakens, competition from cost-effective Chinese electric vehicles (EVs) rises, and European economic conditions remain uncertain. The European auto sector, which sustains approximately 24 million jobs, is sending out distress signals as it navigates this turbulent landscape.
On Friday, a divided EU vote granted a green light for the imposition of substantial tariffs on EVs made in China. While the primary objective is to shield Europe's automotive industry, many, including German automakers, express fear that these trade barriers could have adverse effects, igniting a potential trade war.
Luc Chatel, president of French automotive trade group PFA, articulated the gravity of the situation during a French Senate session: 'The European auto industry is in grave danger.' New car registrations experienced a modest increase of 14 percent, totaling approximately 72 million units in the first eight months of 2023; however, overall, this figure remains low, primarily due to high dealership prices and a sluggish economy that discourages consumers from purchasing new vehicles.
UBS analysts caution that the auto sector's performance is likely to be constrained by worsening economic fundamentals through 2025. The market share of electric vehicles has stagnated unexpectedly, which is critical as the EU aims for a 2035 deadline to phase out sales of gasoline-powered cars. Data reveals that EVs accounted for only 12.6 percent of car sales in Europe during the first eight months of the year—down from 13.9 percent in the prior year.
In a bid to adapt to the evolving landscape, the European Automobile Manufacturers Association (ACEA) urged the EU last month to consider urgent relief measures, raising concerns about stricter emissions targets kicking in next year. Additionally, in a troubling sign of the sector's challenges, Volkswagen announced potential factory closures in Germany for the first time in its history, caused by rising costs and declining demand.
Crisis talks were held last month between the German government and prominent figures in the auto industry, but a middle ground regarding the EU's proposed tariffs remains distant. Germany, concerned about the ramifications for its car makers engaging in the Chinese market, voted against the tariffs, while the German Finance Minister warned against igniting a trade war, advocating for negotiated solutions.
The struggles extend beyond Chinese competition; European automakers are wrestling with a multitude of issues. Kevin Thozet, a portfolio manager at Carmignac, metaphorically states, 'When it rains, it rains cats and dogs.' Following consistent record earnings, Stellantis's expected operating profit margin was recently cut from optimistic double-digit forecasts to a range between 5.5 percent and 7 percent. The company has encountered persistent challenges in North America, as dealerships grapple with overstocked inventories of high-priced vehicles, prompting Stellantis to offer discounts that erode profit margins.
These difficulties have cascading effects on suppliers, such as Autoliv and Forvia, both of which have lowered their earnings outlooks. Forvia's chief executive, Patrick Koller, expressed skepticism about market recovery by the end of 2023, confessing, 'We thought that combustion engines would compensate for the drop in electric motorization, but that didn’t happen.'
Nonetheless, there's a glimmer of hope amid the setbacks. According to Transport & Environment, a European clean transport advocacy group, battery-electric vehicles are on track to achieve a market share of 20 to 24 percent next year. This optimistic forecast is bolstered by the anticipated arrival of seven more affordable electric models slated for release in 2023 and 2025.
'2025 will be a great year for Europeans in the market for an electric car,' declared Lucien Mathieu, director of TE Cars. This sentiment hints at a potential rebound for the industry, provided that it can effectively adapt to the rapidly evolving market conditions and consumer preferences.
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