Europe Growth To Slow, EV Profits Pressured

Europe Growth To Slow, EV Profits Pressured.

“2024 is all about the hard versus soft landing debate”

Western Europe’s car sales growth will slow in 2024 to less than half the pace of this year, while profits, already weakening, will also be pressured by the first tranche of net zero carbon dioxide rules forcing manufacturers to sell a proportion of EVs despite likely losses.

Even while auto sales in Europe looked strong during 2023, the industry’s underlying profit fundamentals were deteriorating fast, as electric cars failed to meet expectations. Prospects weren’t helped by Germany’s surprise decision to end all subsidies for electric vehicles.

Bernstein Research said this is bad news for automakers profits in 2024 and prospects for EV sales.

“Germany’s move will raise further doubts about Western countries’ resolve to support their industrial base in the transition from combustion engines to electric drive trains. This is neither good news for (manufacturers) European earnings nor investors’ view of the BEV outlook,” Bernstein said in a research note.  

According to GlobalData, sedan and SUV sales in Western Europe will increase 5.5% in 2024 to 12.09 million, down from 13.0% growth in 2023. 

Easing supply constraints
GlobalData said 2023 benefitted from easing supply constraints.

“Looking ahead, we expect to see more growth, albeit it at a slower pace than the recent year on year results. 2024 will see supply shortages make way for a market that better reflects underlying demand. However constraints on household budgets, including high interest rates, are set to limit more meaningful growth and market recovery. With the economic outlook more muted next year the forecast has been adjusted downward,” GlobalData said in a report.

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

Investment bank UBS said growing discounts and shrinking order books were already a reality in the EU and the U.S. and manufacturers’ earnings before interest and tax (EBIT) are likely to fall by between 20 and 25% in 2024, excluding Porsche.

Investment bank Morgan Stanley, in a report on European auto investments, said the outlook is a bit uncertain.

“From the highest possible level, 2024 is all about the hard versus soft landing debate. The outcome of this debate will ultimately be the core drive of autos performance next year. If the (U.S.) Fed can cut rates and avoid a recession it fells logical that (manufacturers) stocks, with their extremely low valuations, should catch a bid – something that appears to have happened meaningfully already,” Morgan Stanley said.

Hunker down
“With Morgan Stanley forecasts for lower economic growth, we think investors should hunker down and own low/beta quality safe dividends and self-help,” the investment bank said. 

In 2024, carmakers’ in Britain’s sales will have to include at least 22% pure electric vehicles. A slightly more complicated emissions regime takes hold in the EU to the same effect in 2024, both ending in about 80% of sales in 2030 being pure EV.

This means carmakers will be forced to sell electric cars probably at a loss, while curbing sales of internal combustion engine vehicles which carry fat profit margins.

In Britain the proportion of EV sales rises to 28% in 2025, 33% in 2026, 38% in 2027, 52% in 2028, and 66% in 2029 before hitting at least 80% in 2030. The EU has a similar regime.

Currently, Europe’s (and U.S.) EV sales are plateauing but are expected to accelerate again some time soon. In the last quarter, Ford, GM, VW and Mercedes had to reevaluate their electric car businesses which, particularly in the U.S., had led to large stocks of unsold vehicles building up on dealer’s lots. In December Audi warned that it was taking longer than expected for its EVs to become as profitable as ICE cars. This had been expected by mid-decade but was now delayed.

“The profit margins between internal combustion and electric cars are not converging as quickly as we had hoped,” Audi CEO Gernot Doellner said.

Existential threat
The European industry association ACEA is getting concerned about its manufacturers falling behind China, which, with its alleged 30% cost advantage, poses an existential threat. ACEA quoted a report form France’s Ecole Polytechnique university which talked about an “immense scale of challenges” for the EU industry.

“Unlike China and the U.S., the EU lacks a robust industrial strategy to shore up electric vehicle manufacturing,” said ACEA director general Sigrid De Vries.  

Meanwhile investment researcher Jefferies recently cut its forecast for European EV sales in 2025 and 2030 to 4.1 million and 8.9 million from 4.8 million and 9.3 million. 8.9 million would be about 65% of sales in 2030, 15 percentage points below the target. That would imply huge, crippling fines for auto manufacturers, and might persuade EU authorities to dilute the rules. 

Fitch Ratings said in a report earlier this month that if these targets become too onerous for manufacturers, governments might step in. Fitch said range anxiety and a lack of investment in the charging infrastructure had slowed EV sales growth. “Regulators, particularly in Europe, also appear to be reconsidering longer-term EV policies,” Fitch said, without elaborating.