Cars: European automakers prepare for recession – 10/02/2024 – Market

Financial statements from car manufacturers including Volkswagen and Stellantis are fueling fears that the European industry will be trapped in a deeper and more prolonged recession.

In early 2024, the industry expected a return to normality after supply chain disruptions caused by Covid-19 were resolved, with vehicle production expected to increase by more than 2 percent due to pent-up demand. Instead, companies are facing problems on multiple fronts, including intense competition in China, weak European demand and the region’s slowing transition to electric vehicles.

“We all assumed things would normalize, but they are taking a turn for the worse. Suddenly there is an acceleration in the negative factors and the magnitude of the deterioration is large,” said Jefferies analyst Philippe Houchois.

Automakers also need to be prepared for a longer recession as they deal with higher technology investments, lower margins on electric vehicles and more competition from Chinese rivals as they push into foreign markets, analysts warn.

“There are fundamental headwinds in virtually every geography for the industry as a whole. It will be premature to say that through 2025 things will start to look better,” said UBS automotive analyst Patrick Hummel.

The biggest headwind came from China, the world’s biggest auto market, which has been hit by the property sector slowdown. Although Beijing has rolled out a series of stimulus measures to bolster the economy, companies like Volkswagen and Mercedes-Benz are likely to struggle as customers choose local brands with superior technology and low prices.

The market share of foreign brands in auto sales in China is at a record low of 37 percent in the first seven months of 2024, down from 64 percent in 2020, according to data from Automobility, a Shanghai consultancy.

The drop has been particularly sharp for German carmakers, which now have less than a 15 percent share compared with nearly 25 percent four years ago, Chinese industry data shows.

In recent weeks, Mercedes-Benz and Porsche have warned of lower-than-expected profits as luxury car sales in China have been hit by slow consumer spending.

Western automakers, who benefited from economies of scale by selling large volumes of gasoline cars in China, will see those benefits diminish as they lose market share to local rivals offering high-end EVs, according to Matthias Schmidt, an independent car analyst.

International automakers will have to compensate for tight margins by raising prices in other markets. “There are many negative consequences [no mercado chinês] that are not within China’s borders,” he said.

In Europe, where higher interest rates have limited sales growth, auto companies are also struggling with slowing growth in EV sales and supplier bankruptcies causing component shortages.

The outlook is unlikely to improve next year, with new EU carbon emissions standards forcing European carmakers to sell more EVs instead of gasoline cars despite weak demand.

“From a pricing perspective, 2025 could be a very difficult year in Europe,” said Daniel Schwarz, automotive analyst at Stifel. “They have to sell more electric cars. People don’t want them. They have to offer more discounts for these cars.”

The slowdown in growth in demand for electric vehicles has also fueled a drop in total sales in Europe. During June to August, new vehicle registrations fell 3 percent for Volkswagen and almost 10 percent for Stellantis, according to data released by the European auto industry body.

Volkswagen, which counts China as its biggest single market, is considering closing factories in Germany for the first time in its 87-year history as it seeks to cut costs to survive the challenges. Europe’s biggest carmaker reported a 0.9 percent operating margin for its VW car brand in the first half and last week warned that its overall operating profit margin would fall to 5.6 percent in 2024, compared with 7 percent from last year.

Discounts in Europe will also put further pressure on automotive cash flows, which are or will become negative for Volkswagen, Stellantis and Aston Martin.

The industry has also been rocked by new supply chain problems due to rising insolvencies among car suppliers, especially in Germany.

UK luxury car maker Aston Martin and Ineos Automotive, a new car brand launched by billionaire Jim Ratcliffe, have blamed component shortages for production delays, while Porsche issued a profit warning in July due to to disruptions caused by flooding at an aluminum supplier.

“Over the last six to nine months, blue-chip suppliers have had fires, floods or administrators appointed to an extent and scale that I personally have not seen in my career,” new Aston Martin CEO Adrian Hallmark told investors after the group listed in London reduced its vehicle delivery target on Monday (30).

In addition to external factors, some of the problems were caused by the companies themselves, analysts said. Peugeot and Chrysler car maker Stellantis, for example, is struggling in the US after pricing its vehicles too high.

“We made some mistakes this year and we paid the price in the stock price,” Natalie Knight, Stellantis’ chief financial officer, said recently. The group’s shares have fallen by more than half since their peak in March.

Following Monday’s profit warning, the world’s fourth-largest carmaker’s operating profit margin is estimated to fall to 2.4 percent in the second half compared with 10 percent in the first six months of the year. This is due to the heavy discounts the group is offering US dealers to clear high inventory in its largest market.

Bernstein analyst Stephen Reitman said this year will be a crucial test case for whether carmakers will try to overcome slowing demand with painful production cuts or turn to a fierce discounting battle with rivals, which will harm your profitability.

“We knew that 2024 would be a difficult year and therefore a test of their commitments to favor value over volume,” Reitman said, adding, “If companies reduce production rather than try to destroy themselves with discounts, then the Investors may look a little more positively at the sector. But if they fail and go back to their old ways, it will be much more negative.”