Europe’s Auto Makers Can Handle Conventional Obstacles, But A Trade War?

Even if European automakers shake off the expected recession, weather the inflationary storm and face down the China challenge, they’ll have to face intensifying competition as production shakes off the semiconductor shortage straitjacket. A trade war with the U.S. could have nasty consequences.

Stellantis CEO Carlos Tavares’ fears restructuring might be unavoidable came early in the year, when Ford Europe said it needed to be more competitive as the industry transitioned to electric cars. German unions said job cuts might reach 3,200 across Ford Europe.

The European industry had barely had time to focus on the existential challenge from China, when the implications of the U.S. Inflation Reduction Act (IRA) and its $370 billion worth of clean-technology subsidies became clear.

Speaking at the Davos annual World Economic Forum, European Commission President Ursula von der Leyen worried about IRA’S impact on the European auto industry, which subsidizes electric vehicles only if they are assembled in North America. This threatens to undermine Europe’s plan to make itself a world leader in electric car technology and led to calls that the EU and Germany needed to fund a similar plan to boost its world players.

Without some mitigation, this points to the possibility of a damaging trade war. When companies invest in new technology to defeat opponents by being better, that might be brutal, but it is more likely to generate constructive outcomes. When countries feel they must subsidize their domestic champions in order to win, nobody does. The World Trade Organization was set up to avoid such unfair and wasteful competition. Amendments to the legislation in Congress from Senator Joe Manchin (D-W.Va) make the possible impact on Europeans even less easy to read.

The U.S. has set a goal that 50% of auto production should be electric or plug-in hybrid PHEV) by 2030. The EU will ban all sales of all new ICE vehicles and PHEVs by 2035. California has mandated a ban on new ICE vehicles by 2035, with limited PHEV sales.

Bottom lines will soon reveal the true state of the industry as it reacts to these challenges.

Investment bank UBS reiterated its forecast that industry earnings will dive about 40% in 2023 and reckoned Tesla’s price cuts will trigger a price war in electric vehicles with industry-wide consequences. Traditional manufacturers making internal combustion engines (ICE) will be sucked in too, but because of their higher costs their plans will derail the “narrative of EV margin parity”.

“The (financial subsidiaries of U.S. and German manufacturers) will come under pressure and profits in the China joint ventures will be structurally at risk. We prefer luxury over premium over (mass market manufacturers) against this backdrop and see suppliers as a better place to hide,” UBS said in a report.

Automotive analysts at Autovista24 expect sedan and SUV sales in Europe in 2023 to jump 12.2% to 12.67 million. That sounds positive but Autovista24 said what it called “the continent’s beleaguered automotive sector” will recover in the medium and long-term but it also downgraded the region’s outlook for 2024 and 2025 and added this ominous thought.

“The volume of new car (sales) in Europe is not expected to return to pre-pandemic levels until the middle of the next decade,” Autovista24 said. You read that right; 2035.

Investment researcher Bernstein said investors should enjoy likely laudable results for 2022 while they can, because things will soon get tough.

“The initial weeks of 2023 have already shown that price competition is back. With production ramping up, the pricing cycle has ended in China, is ending in the U.S., and only Europe will enjoy a few more carefree months,” Bernstein said in a report

LMC Automotive earlier this month said Western European auto sales will jump 7.8% in 2023 to 10.95 million. LMC warns of a “recessionary period” in the first half of 2023.

These forecasts have to be compared to the pre-coronavirus tally of 14.29 million sales in 2019. Much of the industry’s production is still geared to meeting a Western European market more than 3 million bigger than current expectations.

In 2022, Western European sales fell 4.1% to 10.15 million. Western Europe includes all the big markets like Germany, France, Britain, Italy and Spain.

Stellantis’s Tavares, speaking at the CES technology trade show in Las Vegas last month, warned that plant closures were possible as more high-priced electric cars caused the overall market to shrink. Tavares pointed out again that the auto industry had to absorb BEV’s 40% higher costs.

According to the Financial Times on Thursday, the EU is pondering action to combat the negative impact of the IRA. In an article from its Washington and Brussels reporters, the FT pointed out BMW among other is drawing up plans to boost investment in the U.S. The EU has set up a “task-force” to lessen some of the impact of the IRA which requires U.S. sourcing.

Last month, French President Emmanuel Macron said while meeting President Biden in the U.S., that the IRA might “fragment the West” because it appeared to unfairly boost U.S. trade.

Some commentators reckon the IRA undermines the World Trade Organisation’s (WTO) free-trade rules, and the EU should first pursue action through the WTO, rather than enter a ruinous subsidy bidding war with the U.S.