European Automakers Face Hurdles In 2023 As China Threat Looms

The European automotive industry faces a tough year. Will there be a full-blown recession or just a mild one? One leading manufacturer warns of factory closures in 2023, another says be prepared for volatility and challenges. An investment researcher declares global recession is in the air. Another industry expert talks of an uncertain year for the global auto sector, while another expects more “normalcy” in 2023.

In Europe, the threat from China will be formidable, particularly in the electric car sector.

As the industry recovers from the devastation wrought by the coronavirus pandemic, it’s hardly surprising experts are conflicted. The pandemic brought severe supply chain disruption led by the shortage of chips. The Russian invasion of Ukraine sent shock waves around the world particularly in Europe, as a leap in the cost of energy took a huge bite out of consumers’ disposable incomes.

To compound uncertainty the European industry and the global one too is in the foothills of the electric revolution. This requires massive investment, made more dangerous by the fact the European Union’s (EU) politicians have already decided battery electric vehicles (BEV) will win the technical race, hands down. They’ve decreed new internal combustion engine (ICE) powered sedans and SUVs persona non grata by 2035. And that includes plug-in hybrids, outlawed despite public hesitation over the all-round capability of BEVs.

According to industry consultants LMC Automotive, Western European auto sales will jump 7.8% in 2023 to 10.95 million. That sounds promising but the previous month it forecast a 9.4% gain. LMC Automotive warns of a “recessionary period” in the first half of 2023.

If either of these projections look solid and healthy, they become less so when you remember 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.

Supply problems are on the mend, but not yet back to normal.

“We expect supply constraints to improve over time, and they will continue to dictate vehicle sales, with potential buyers continuing to have lengthy wait times for new cars. Moreover, despite underlying demand having been well above what (manufacturers) can supply, as evidenced by order backlogs, demand conditions themselves are worsening as Western Europe moves into a recessionary period over the first half of 2023,” LMC said in a report.

“Households continue to face the squeeze of higher prices and increased financing costs, which will affect their appetite to purchase big ticket items. As such, there is a growing risk that with a worsening macroeconomic outlook, the weakening demand side will soon begin to influence vehicle sales,” the report said.

Stellantis CEO Carlos Tavares, speaking at the CES technology trade show in Las Vegas last week, 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.

“If the market shrinks we don’t need so many plants. Some unpopular decisions will have to made,” Reuters quoted Tavares as saying, without adding any geographical details.

Stellantis was created by the merger of Peugeot and Fiat Chrysler, and includes brands like Citroen, Opel, Vauxhall, Jeep, Dodge, Ram, Lancia, DS, Alfa Romeo and Maserati. It is now the second biggest seller Europe, behind Volkswagen.

Volkswagen, in a statement after it announced VW brand sales fell 6.8% in 2022 to 4.56 million, said the chip shortage was still ongoing and 2023 will remain volatile and challenging. Volkswagen brands include Audi, Porsche, SEAT, Skoda, Bentley and Lamborghini.

Investment researcher Evercore ISI, in its 2023 outlook, said global recession is in the air.

“As we peer into 2023 a true global production recovery remains elusive, while pricing and volume/mix continues to dominate the debate. We see ’23 global production tracking +4% currently, slightly above LMC’s +3% forecast and down from earlier +5-6% forecasts,” Evercore ISI said in a report.

“Europe still has limited visibility given unknowns on energy policy and Russia/Ukraine risk. We’re seeing slightly higher production (+1-4%) but clear risks of flat/down,” Evercore said.

Philip Nothard, analyst at consultants Cox Automotive, forecast an uncertain year as production improves. Essential ingredients like cobalt, magnesium, platinum and lithium are becoming more expensive, which is particularly harmful for BEVs.

“Add this to high-interest rates and inflation for most EU nations and there are understandable issues around business and consumer confidence,” Nothard said in an article in Automotive News Europe.

And watch out for the Chinese.

“Chinese brands looking to gain ground internationally will fill the void left by established automakers as they discontinue affordable – but ultimately unprofitable – legacy (ICE) models. For now, many Chinese manufacturers will focus on offering EVs as well as combustion and hybrid variants. China has huge acceleration plans for EVs, but there are barriers from Europe and the U.S., if they don’t have any local manufacturing,” Nothard said.

Automotive News Executive Editor Jamie Butters said 2022 wasn’t the recovery year he’d anticipated.

“Russia’s invasion of Ukraine took the legs out of European production, which remains a significant part of the globally integrated auto industry,” he said in a column.

“The coming year may bring a return of more normalcy in terms of factory output and vehicles selling at or below sticker (price),” Butters said.

“But it’s a changed industry we’re returning to: more digital retail, more EVs,” he said.

Perhaps German automakers can point the way to a less fraught 2023.

According to Professor Oliver Falck of the IFO Institute, German automakers remained in a “strained” mode in December, according to its latest survey.

“Overall, the German automotive industry appears to be in a better position today than in late summer 2022. However, expectations for the coming months remain cautious,” Falck said.