European Auto Makers Face Profit Hit, While Industry Seeks China Import Action.
“We lowered our global production outlook to zero growth in 2023, despite improving chip supply. Demand destruction no longer seems to be a vague risk, but has started”
The European car market is about to fall off a cliff as the recession kicks in and inflation bites. With competition from China gathering pace it’s no surprise manufacturers are now pleading for protection against unfair imports and want more government subsidies to prop up sales of electric vehicles.
One investment bank expects overall profits to halve in 2023.
Big international motor shows allow global auto manufacturers to stand together to make a case, but because of the thin ranks attending the biennial Mondial de l’Automobile in Paris, the industry’s spokesmen were restricted.
Stellantis CEO Carlos Tavares wanted Chinese imports to receive equal treatment as European exports to China. Europe imposes a 10% tariff on Chinese car imports, but vehicles going the other way pay between 15 and 25%. The Chinese launched a big electric offensive at the show. BYD unveiled the compact SUV the Atto, the Tang mid-size SUV and the Han midsize sedan. Great Wall showed its Ora Funky Cat. The industry seems a bit nervous about this, but many of these sedans and SUVs from unknown brands will compete directly against BMWs, Audis and Mercedes. Unknown brand versus the Germans usually ends up only one way.
Electric cars dominate the show, led by the Renault 4ever compact SUV, Stellantis’s Jeep Avenger, and the Fisker Ocean. There were a few urban runabouts including the Renault Mobilize Duo, and the recently launched Microlino from Italy. These are known as “quadricycles” in France which means they are very slow and therefore don’t require a driver’s license. Safety regulation is light. A Chinese candidate is called the XEV Yoyo which also offers a battery-swapping service. It remains to be seen how these often unsafe, slow and weird- looking machines fare in the grown-up marketplace.
Battery prices reverse
Renault’s CEO Luca de Meo said the long-predicted fall in the price of batteries, a key element in electric vehicles’ long-time competivity with ICE cars, had gone into reverse. De Meo said the price per kilowatt-hour should have fallen to $100 by now, but this hadn’t happened, and was unlikely to anytime soon.
“I do not see this parity getting close,” he told reporters at the show.
The case for electric car subsidies was made at least for France when President Emmanuel Macron announced a scheme giving people on lower incomes better breaks to buy electric cars.
Mondial de l’Automobile 2022 was the first Paris show since 2018 because of the Covid pandemic, and many global automakers decided not to attend. And not just because of the coronavirus. Manufacturers are no longer sold on the idea of car shows. They are seen as too expensive and there are better ways to launch new products. Volvo’s (owned by China’s Geely) Polestar recently launched its 3 SUV in Copenhagen, where it didn’t have to share headlines. Mercedes isn’t appearing at the show but launched its EQE electric SUV at the Rodin Museum in Paris. Volvo will launch its big EX90 next month. BMW unveiled its M2 before the Paris show
The list of no-shows includes Stellantis’s Fiat, Maserati and Alfa-Romeo, VW and its Audi, Porsche, SEAT and Skoda subsidiaries, BMW and Mini, Hyundai and its Kia affiliate, Jaguar Land Rover, Toyota and Lexus, Mercedes, Subaru, Volvo, and Ford.
European markets are weakening and likely to accelerate down in 2023. ACEA, the European carmakers association known by its French acronym, expects sales in the European Union (EU) to slip 1% this year after previously expecting a return to growth. In 2022, markets were stagnant at best, but profits were high because of weird conditions. The chip shortage crimped big overall sales targets and meant most carmakers had to switch to selling fewer vehicles but made sure they were mainly high-margin vehicles.
Next year looks poor
Over the next few weeks manufacturers will likely report strong profits, but next year looks poor.
Investment bank UBS expects manufacturers to report strong profits in 2022’s 3rd quarter, but to deteriorate sharply thereafter. Next year UBS said earnings per share of the big European and U.S. manufacturers will fall about 50%.
“We recently lowered our global production outlook to zero growth in 2023, despite improving chip supply. Demand destruction no longer seems to be a vague risk, but has started to become a reality,” UBS said in a report.
“We expect (European manufacturers) to be hit four-fold next year –
- Global auto markets that shift from under to oversupply, with significant pricing- pressure as a result.
- A weakening product mix as consumers need to downgrade.
- Inflationary pressures that cannot be passed on.
- Higher credit risk and shrinking residual values
Berenberg Bank of Hamburg agrees things look bleak for Europe in 2023.
“Although there has not been a significant erosion in automotive demand so far this year, 2023 weakness appears increasingly likely. We have cut our 2023 2nd half auto (manufacturers) earnings outlooks on greater price-mix erosion, particularly in mass-market vehicle segments,” the bank said in a report.
Professor Ferdinand Dudenhoeffer, director of the Center for Automotive Research (CAR) in Duisberg, Germany, said the mood in Paris was gloomy, with the show itself a shadow of its former self, and this was coupled with dreary economic prospects for Europe.
“The car markets in Europe will be stuck in a bind in 2023 while China’s car market is picking up speed again. And the USA is up and running thanks to the Biden administration’s Inflation Reduction Act with its “green” swing. This means that the USA is now also becoming an important market for electric cars and could overtake the EU in 2023,” Dudenhoeffer said.
Stellantis’s Tavares worried that Chinese automakers could establish themselves in Europe by selling cars at a loss.
“The European market is wide open to the Chinese and we don’t know if their strategy is to grab market share at a loss and increase prices later,” Tavares said, according to Automotive News Europe.
Tavares also repeated his plea that the EU water down its plan to outlaw sales of new ICE vehicles by 2035, which also curbed sales of plug-in hybrid electric vehicles from 2030.
Tavares has said before that if new cars become too expensive for Europeans on average earnings, there could be a big political storm.
“The dogmatic decision that was taken to ban the sale of thermal (ICE) vehicles in 2035 has social consequences that are not manageable,” Tavares said.
The Paris Motor Show – Mondial de l’Automobile 2022 – “Revolution Is On” – runs through October 23 at the Paris Expo Porte de Versailles.