Pairs Auto Show – Europe Industry Faces Near Term Upheaval.
“We’ve had good years (since the financial crash) but now it is getting harder and harder”
The European car market has performed strongly since the dark days of the 2008 financial crash, but that healthy scenario is about to expire as carmakers fend off regulatory problems, and face down damaging trade wars. Longer term, fundamental problems are looming.
Britain’s exit from the European Union (E.U.) (Brexit) next March, and the possible threat to supply chains and markets if a deal isn’t forthcoming, is starting to worry the auto industry.
As the industry gathers for the biennial Paris Auto Show, it is spending huge amounts of capital on high risk projects that have no guarantee of payback anytime soon, like electric cars and computer driven ones. Pessimists also worry about a killer blow from cash rich technology companies that might blindside traditional carmakers and destroy their business plans at a stroke.
Expect much hype from the assembled CEOs on the great sales prospects tomorrow for electric vehicles, but remember that the previous show in 2016 echoed to similar claims, while available electric cars continue to fail the price, range and charging tests.
Visitors to Mondial de l’Automobile, which runs from October 4 through 14 at Porte de Versailles, Paris, will be struck by the non-appearance of heavy hitters like Volkswagen, Volvo, Mazda, Mini, Mitsubishi, Ford, Nissan, Bentley, Lamborghini, Fiat Chrysler and its Alfa Romeo and Jeep brands.
That’s because of the massive expense and dubious returns from modern auto shows, which seem to be falling out of the popularity stakes as a way of marketing new vehicles.
BMW 3-Series star
Nevertheless, the star of Mondial de l‘Automobile is likely to be the new BMW 3 Series, while Tesla will show the Model 3 before starting its European sales drive in 2019.
Professor Stefan Bratzel, from the Center of Automotive Management (CAM) in Bergisch Gladbach, Germany worries about the many threats to the European industry.
“We’ve had good years (since the financial crash) but now it is getting harder and harder. The industry faces a tariff war as the U.S. and China battle it out. Brexit of course and we are heading towards electromobility and new ideas like mobility sharing and all that. This costs lots of money and there’s a lot of research and development spending going out and not much coming back. The next perhaps 7 years will be difficult,” Bratzel said.
Evidence of increasing difficulties came this week from BMW, citing trade headwinds and rising costs, cut its profit forecast for the year. Mercedes parent Daimler did the same thing a couple of months ago.
Investment bank UBS said BMW’s action should set off alarm bells across Europe.
“This will likely weigh not only on BMW’s ‘safe haven’ image in the manufacturing space, but also increase investor concerns about the auto cycle in general and the political backdrop going into 2019,” UBS analyst Patrick Hummel said.
Already forecasters are scrambling to cut forecasts.
Moody’s expects 2018 sales in Western Europe to grow only 2% this year, and slide to a 0.5% gain in 2019. Western Europe includes all the big markets like Germany, France, Britain, Spain and Italy.
CAM’s Bratzel said export oriented German companies are vulnerable.
“A trade war will inflict particular harm on them,” he said.
“There are some difficult years ahead. There a new competitors like Tesla, but there’s a changing paradigm here too with mobility startups like Uber, technology companies like Waymo, (owned by Google parent Alphabet Inc) Amazon, Apple and the Chinese like Alibaba and TenCent. They have lots of money and they are attacking the business model of the traditional manufacturers with new ideas like mobility on demand, car sharing and connectivity developments. All this will evolve over the next 10 to 20 years,” Bratzel said.
Automotive consultant EY partner Peter Fuss reckons these new challengers are not imminent and the traditional methods have a way to go before being overtaken.
Mid-term business model
“Although we experience new mobility ideas and new players in this market almost every day, there is yet no sustainable and profitable business model for (big manufacturers) and others in reach. Therefore, the midterm business model for the automotive industry will be still driven by car ownership of customers,” Fuss said.
Fuss said recent profit warnings point to pressures over the next year. And regulatory hiccups on fuel efficiency rules have plagued the industry’s recent production schedules.
“When looking at financial results, the European automotive industry is doing well overall. But current issues like fuel economy, new test procedures (known by the acronym WLTP), global customs threats, uncontrolled Brexit are additional burdens to the industry and therefore challenging profits for the next 12 months. We are currently observing profit warnings from several European automotive companies,” Fuss said.
WLTP refers to the E.U. rules which were tightened on September 1 and caused a spurt in sales in August as manufacturers sought to bring forward sales, and which will be quickly reversed in coming months.
John Wormald, analyst with British automotive consultancy Autopolis, described the state of the European industry as “about OK – for now”, but manufacturers will pay for the hiccup over fuel efficiency rules.
“Given everyone, volume makers at least, have too high break-even points with too high fixed costs, too low margins, there will be tears later. The CEOs will of course all talk it up in Paris. They’re eternal optimists, with a total belief that that All New Product is the new wonder weapon that will win them the war,” Wormald said.
CAM’s Bratzel said the no shows at Mondial de l‘Automobile point to upheavals ahead.
“These shows are getting less and less important as a showcase. It’s a sign of a changing industry that the motor show is not any more the basic place to show new products,” Bratzel said.