Revenue warnings by carmakers together with Volkswagen and Stellantis are stoking fears that the European trade might be caught in a deeper and longer downturn.
Firstly of 2024, the sector had anticipated a return to regular after Covid-19 provide chain disruptions have been resolved, with car manufacturing forecast to rise greater than 2 per cent on the again of pent-up demand. As a substitute, corporations are dealing with issues on a number of fronts, together with intense competitors in China, weak European demand and the area’s slowing shift to EVs.
“We’ve all assumed that things would normalise but they are taking a turn for the worse. All of a sudden there is an acceleration in negative factors and the magnitude of the deterioration is big,” mentioned Jefferies analyst Philippe Houchois.
Carmakers additionally must be braced for an extended downturn as they grapple with greater know-how investments, decrease EV margins and extra competitors from Chinese language rivals as they make inroads into international markets, warn analysts.
“There are fundamental headwinds in pretty much every geography for the industry as a whole. It will be premature to say that in the course of 2025 things will start to look better,” mentioned UBS automotive analyst Patrick Hummel.
The largest headwind has come from China, the world’s largest automotive market, which has been hit by the property sector slowdown. Though Beijing has unleashed a swath of stimulus measures to bolster the economic system, the likes of Volkswagen and Mercedes-Benz are more likely to wrestle as clients select native manufacturers with superior know-how and low pricing.
Overseas manufacturers’ market share of Chinese language auto gross sales is at a report low of 37 per cent within the first seven months of 2024, down from 64 per cent in 2020, in accordance with information from Automobility, a Shanghai consultancy.
The decline has been notably steep for German carmakers, who now have lower than a 15 per cent share in contrast with almost 25 per cent 4 years in the past, Chinese language trade information exhibits.
In latest weeks, Mercedes-Benz and Porsche have warned of decrease than anticipated income as gross sales of luxurious vehicles in China have been hit by sluggish shopper spending.
Western carmakers, which had loved economies of scale from promoting massive volumes of petrol vehicles in China, will see these advantages declining as they lose their market share to native rivals providing cutting-edge EVs, in accordance with Matthias Schmidt, an unbiased automotive analyst.
Worldwide carmakers must compensate for the squeezed margins by elevating costs in different markets. “There are a lot of negative consequences [in the Chinese market] that are not staying within China’s borders,” he mentioned.
In Europe, the place greater rates of interest have capped gross sales development, automotive corporations are also combating slowing development in EV gross sales and provider bankruptcies inflicting element shortages.
The outlook is unlikely to enhance subsequent 12 months with new EU carbon emissions requirements forcing European carmakers to promote extra EVs somewhat than petrol vehicles regardless of sluggish demand.
“From a pricing perspective, 2025 could be a very difficult year in Europe,” mentioned Daniel Schwarz, an automotive analyst at Stifel. “They have to sell more electric cars. People don’t want them. They have to provide more discounts for these cars.”
The slowing development in electrical car demand additionally has fuelled a decline in total European gross sales. Throughout June to August, new car registrations dropped 3 per cent for Volkswagen and almost 10 per cent for Stellantis, in accordance with figures launched by the European automotive trade physique.
Volkswagen, which counts China as its greatest single market, is contemplating shutting crops in Germany for the primary time in its 87-year historical past because it seeks to chop prices to outlive the challenges. Europe’s largest carmaker posted an working margin of 0.9 per cent for its VW passenger automotive model within the first half, and final week warned its total working revenue margin would fall to five.6 per cent in 2024, in contrast with final 12 months’s 7 per cent.
The reductions in Europe will additional stress automotive money flows, that are or will flip adverse for Volkswagen, Stellantis and Aston Martin.
The trade additionally has been shaken by new provide chain points following the rising variety of insolvencies amongst automotive suppliers, notably in Germany.
UK luxury-car maker Aston Martin and Ineos Automotive, a brand new automotive model launched by billionaire tycoon Jim Ratcliffe, have blamed element shortages for delays with manufacturing, whereas Porsche issued a revenue warning in July attributable to disruptions attributable to flooding at an aluminium provider.
“Over the past six to nine months, blue-chip suppliers have had fires, floods or administrators appointed to an extent and a scale that I personally haven’t seen in my career,” Adrian Hallmark, Aston Martin’s new chief government, informed traders after the London-listed group reduce its car supply goal on Monday.
Along with exterior components, among the issues have been self- inflicted, mentioned analysts. Peugeot and Chrysler maker Stellantis, for instance, is struggling within the US after it had priced its automobiles too excessive.
“We’ve made some mistakes this year and we’ve . . . paid the price in the share price,” Natalie Knight, chief monetary officer at Stellantis, mentioned lately. The group’s shares have greater than halved since their peak in March.
Following its revenue warning on Monday, the world’s fourth-largest carmaker’s working revenue margin is estimated to plummet to 2.4 per cent within the second half in contrast with 10 per cent within the first six months of the 12 months. That’s as a result of heavy reductions the group is providing to US dealerships to clear excessive stock in its greatest market.
Bernstein analyst Stephen Reitman mentioned this 12 months might be a pivotal take a look at case as as to whether automotive producers will attempt to overcome slowing demand with painful cuts to manufacturing or flip to a bruising low cost battle with rivals, which can damage their profitability.
“We knew that 2024 was going to be a tough year and so a test of their pledges to favour value over volume,” Reitman mentioned, including: “If corporations reduce manufacturing as an alternative of making an attempt to kill one another with reductions, then traders could look a bit extra positively on the sector. But when they fail and revert to outdated methods, it is going to be rather more adverse.
Extra reporting by Edward White in Shanghai
