Rosy Scenario For Europe’s Carmakers Likely To Stumble

Auto sales and manufacturers’ profits in Europe have been bounding ahead, but investors worry that a faltering economy and a price war initiated by electric vehicle maker Tesla may also infect the traditional combustion sector and end the positive scenario.

The profitability of high-end manufacturers like BMW, Mercedes and Volkswagen’s Audi and Porsche subsidiaries have benefitted from a combination of events. The shortage of semiconductors may have depressed production, but strong demand has allowed them to sell more highly profitable sedans and SUVs and end up making even higher overall profits. Some mass vehicle manufacturers have followed a similar path, but higher interest rates have weakened demand and the slowing economy is undermining sales.

The supply chain that was wrecked by the Covid pandemic has largely been restored, but now demand is faltering. Prices and therefore profits are likely to come under pressure as carmakers scramble to find buyers for their products.

S&P Global Ratings said in a recent report that what it called positive momentum in European sales could falter in the second half of 2023 as the economy weakens and tighter monetary policies undermine consumer purchasing power. S&P Global Ratings expects stagnation in Europe this year.

LMC Automotive points out that despite strong Western European sales so far this year and an 8% increase expected for 2023 to 10.96 million, the market is still significantly below the 14.29 million achieved in pre-Covid 2019.

“Most markets in the region are still significantly below pre‐pandemic 2019 levels. As such, we expect to see further improvements in selling rates as supply picks up. While underlying demand has taken a hit from rising interest rates and slowing economic growth, on a more positive note, the economic outlook has generally improved from the start of the year. That said, supply is still expected to dictate market pace this year,” LMC Automotive said in a report.

Investment bank UBS said Tesla’s price cutting means Europe’s electric carmakers will have to follow and with their higher cost structures the drive to make EVs as profitable as internal combustion engines (ICE) will be derailed.

“There should be a knock-on effect on ICE pricing too. Irrespective of Tesla price cuts, the ICE segment should be much more competitive as production and inventories have grown while demand has declined in the 4th quarter,” UBS said in a report.

Mass carmakers will likely find maintaining price discipline and high mix difficult, while expecting only flat to slightly higher sales.

“We’re cautious on all mass (market manufacturers) for 2023, while preferring more cycle-resistant luxury names and Tesla thanks to cost and technical leadership,” UBS said.

Bernstein Research said Tesla’s price cuts have shaken up the market and put pressure on competitors, but will have annoyed Tesla’s current customers who have seen the value of their cars undermined. As well as stimulating demand, it might also have the reverse effect as many potential electric vehicle buyers decide to wait for the next big price cut. This might have a positive outcome for Tesla’s upmarket competitors.

“Tesla is not only sacrificing its EV margins to achieve its volume ambitions. To some extent it is also placing the goodwill and brand equity that it has built up on the altar too. This is most important in the premium end of the market, where brand perception and social status are the crux of sales. We see Mercedes and BMW’s offerings have now moved clear out of Tesla’s price range. They’re still holding on to their brands. In the long-run, this may actually be good for the premium (manufacturers),” Bernstein said in a report.

Source: https://www.forbes.com/sites/neilwinton/2023/05/08/rosy-scenario-for-europes-carmakers-likely-to-stumble/