Tepid European Auto Recovery Will Ignite Competition While Electric Car Growth Slows

Cut-throat competition will return to Europe’s car market this year as sales turn positive, while electric sales will pause for breath.

The emergence of a new threat from China’s mainly electric vehicles will add an extra level of difficulty for Europe’s manufacturers. If this threat poses a serious problem for Europe’s industry, expect protests from European Union (EU) politicians. The U.S. Inflation Reduction Act threatens lucrative exports and could trigger a trade war if the U.S. doesn’t restore what Europeans feel is fair access.

In 2022 some auto manufacturers – mainly upmarket German ones – managed to exploit the difficulties posed by a lack of semiconductors. Because the shortage forced them to cut volume, by restricting sales mainly to their most exotic and higher-priced machines lower sales often meant fatter profits.

In 2023, production and sales will increase and tough market conditions will be restored. Profit margins will come under pressure. Unfortunately for investors and the industry, this return to normality still won’t resemble the market strength displayed before the coronavirus pandemic.

For battery electric vehicles (BEVs), the huge acceleration in sales since 2020 will run out of steam, mainly as huge German subsidies are slashed. Manufacturers made sure they produced as many BEVs last year as possible while subsidies lasted, so the market will be saturated for some months. EU rules demanding ever smaller carbon dioxide (CO2) emissions don’t tighten again for a couple of years, so the pressure to sell BEVs will relent for a while.

LMC Automotive expects a healthy 7.8% increase in Western Europe sedan and SUV sales to 10.95 million after 2022’s 4.1% fall. Don’t forget the pre-coronavirus tally was a whopping 14.29 million in 2019. Much of the industry’s production is still geared to meeting a Western European market more than 2 million bigger than current expectations. LMC added some cautionary factors to its forecast.

“Vehicle supply constraints continue to persist into 2023 for West European countries as the demand for vehicles still outweighs supply. However, our forecast assumes that the production bottlenecks will ease during 2023, resulting in year on year growth in registrations for the year,” LMS said in a report.

“That said, the market is expected to remain some way down on 2019 levels. From a macroeconomic point of view, West European countries are experiencing recessionary conditions, with higher prices and interest rates squeezing real household incomes. Although a clear downside risk to the outlook comes in the form of a more pronounced macroeconomic decline, order backlogs provide some cushion to this,” LMC said.

Western Europe includes all the big markets of Germany, France, Britain, Italy and Spain.

Schmidt Automotive Research said 2023 Western European BEV sales will rise to 1.6 million from 1.5 million in 2022. Market share will remain at 15.1 % of a bigger overall market. Growth in BEV sales will slow between 2022 and 2024 to less than one percentage point.

“BEV mix isn’t expected to see major inroads until 2025 when the next (EU mandated) CO2 cut enters into force. We expect a 4.9% increase over 2022 levels to 20% by 2025,” Schmidt Automotive said in a report.

Schmidt Automotive expects by 2030, BEV sales in Western Europe will reach 65% of an overall 14.2 million market.

Investment bank UBS doesn’t subscribe to this feel-good scenario for overall sales.

“We expect to see positive year-on-year growth rates (in European car sales) in the coming months, as the Q2 2022 base is heavily affected by Russia-Ukraine war, which halted some production lines for several weeks,” UBS said in a report.

“However, we don’t forecast 2023 sales to beat the previous year’s as dealers already urge (manufacturers) for price cuts on top of weak order intake. We stick to our view that (manufacturers) will have to choose between either losing volumes with current prices or lower prices to maintain volumes, either of these being negative for earnings,” UBS said.

French auto consultants Inovev expect sales in all of Europe to increase a maximum of 4% in 2023, without much change in the overall health of the market, still lagging hugely behind pre-pandemic. 2024 should be stronger.

“Basically, the dynamics of the market should not change drastically in 2023 compared with 2022, given the economic and political environment which should not evolve strongly this year. We should therefore be able to reach slightly more than 13 million in our reference scenario. That is still far from the 17.3 million reached in 2019. More significant market growth could however occur from 2024 with an expected increase of 5 to 6%,” Inovev said.

Meanwhile, a formal reaction from the EU to the U.S. IRA is expected.

Luca de Meo, Renault CEO and president of the European Automotive Manufacturers Association said protectionism leads to inflation and inefficiencies, without making an explicit accusation.

“But I think the European community must react (to the IRA). You need to find counter-measures to protect industry,” he said, according to Automotive News Europe.