The European auto industry’s vital signs look promising, but although sales are rallying they lag way behind pre-COVID peaks, while the economic background points to trouble ahead for investors. And the Chinese are coming.
Forecasters are confidently pointing to strong sales growth. LMC Automotive says car and SUV sales in Western Europe will accelerate by 9.2% in 2023 to 11.08 million; that’s faster than the 8.6% it was expecting a month ago. Alix Partners says sales in all of Europe will rise 6% to 15.9 million this year.
On the sidelines, Chinese manufacturers are dusting down fleets of sparkling new battery electric vehicles (BEVs) packed with state-of-the-art technology and with an alleged 20% price advantage. Europe’s home-grown BEV challenge is looking a bit questionable after news Volkswagen reportedly cut output of its ID.4 SUV and ID.7 sedan at its Emden plant for a couple of weeks due to flagging sales. A union official told a local newspaper demand for electric cars made at the plant was nearly 30% below the expected level.
The cutting or withdrawal of government subsidies has weakened demand for BEVs in Germany, Sweden and France.
Investment bank Morgan Stanley wondered if this had implications for VW and the overall market for BEVs.
“Whilst the cuts are only expected to last for 2 weeks, we question what this might imply about wider trends for BEV’s and VW’s position in the market,” Morgan Stanley said in a research note.
The sales forecasts from LMC Automotive and Alix Partners remind us that this leaves the market seriously short of the heights achieved before COVID-19 struck in 2019. European sales peaked at 20.8 million in 2019, while Western Europe hit 14.29 million. (Western Europe includes all the big markets of Germany, Europe’s biggest, France, Britain, Italy and Spain).
This big divide between 2019 and now reminds investors that sales need to recover much more lost territory before an increase in business means maximizing profits. European sales after this year’s increase will be almost 5 million a year short of a healthy industry, and for Western Europe this is a shortfall of just over 3 million.
Germany is in the grip of a recession. According to the IFO Institute, Germany’s economy will shrink by 0.4% this year. In 2024 the bounce-back will only be by 1.5%, after it predicted a 1.7% gain earlier. Inflation will slowly decline from 6.9% in 2022 to 5.8% this year and 2.1% in 2024.
The IFO said business expectations for Germany’s auto industry are faltering.
“Automakers are experiencing great uncertainty comparable to the early days of the war in Ukraine, or to when the risk of gas rationing in manufacturing shot up last fall,” the IFO’s Oliver Falck said.
Bernstein Research still retains its positive view despite market scepticism and economic weakness.
“Our scenario analysis suggests that a global recession-sized downturn — impacting volumes, prices, and margins simultaneously — is required to support this negative view,” Bernstein analyst Daniel Roeska said.
“We see more risk to the upside. Pent-up demand will partially offset growing macro and affordability headwinds. This drives higher free cash flow, helping (manufacturers) pay for the electric transition and improve shareholder distributions at the same time,” Roeska said.
Roeska said European manufacturers have order books of between 6 and 8 months, while raw material tailwinds this year and next will help profits. Downside risks are extremely limited, despite the weakening economic outlook.
Investment bank UBS has been consistently negative about the prospects for European automakers, maintaining that higher sales wouldn’t filter through to the bottom line.
“We expect the volume recovery to translate into higher revenues for (manufacturers), however not higher margins, as we expect the price/mix trend to be negative sequentially. Additionally, we expect the pressure to increase in the 2nd half when (manufacturers’) order banks get depleted due to already lack-lustre new orders,” UBS said in a report.
UBS also detects a weakening in BEV orders, at least those made by Europeans, as Tesla cuts prices. German BEV sales are also under pressure as government subsidies end.
Alix Partners, in a recent report, predicted U.S. sales will rise 10% in 2023 and Chinese 3%. It said pre-COVID sales may never return to Europe, where there will be an almost complete retreat from combustion-powered vehicles because of European Union regulations. The EU has banned the sale of new combustion vehicles by 2035, including hybrids and plug-in hybrids. Alix Partners predicts by 2035 BEV sales will reach 82% of sales.
There is a mounting wave of criticism of this policy across Europe because it was never seriously debated, and the impact on Europe’s average wage-earners ignored. But the policy remains firmly in place.
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