The weakness of the European economy
Automobile sales in Europe still look strong, but the underlying earnings fundamentals are rapidly deteriorating, which isn’t helped by the fact that electric cars aren’t meeting expectations.
Volkswagen and Mercedes are particularly under pressure, but BMW is resisting the stress.
European Automobile Manufacturers Association the data seems healthy, but behind the numbers, the negative points accumulate. In October 2023, car sales in the EU increased by 14.6% to 855,484 units, even though the largest market, Germany, grew by only 4.9% compared to the same period last year.
Outward signs of success mask a weakened environment. Supply chain disruptions have been repaired and new cars are hitting the markets quickly and en masse. This is driving down prices and will affect the industry’s profit margins later this year and next year. Western Europe, including the five largest markets of Germany, France, Britain, Italy and Spain, is still hit by inflation and high financing costs.
Overall annual sales in Western Europe stood at an annual rate of 13.6 million in October, according to Global data. This is around 3 million fewer than pre-Covid in 2019.
Mercedes and Volkswagen are struggling to sell electric vehicles. VW has reduced production numbers for the ID.3 and Cupra Born at its all-electric Zwickau plant after temporarily halting production of the Audi A4 E-tron, ID.4 and ID.5 in October. VW warned its profits were under pressure.
The Mercedes Benz EQE 500 4MATIC SUV has up to 269 miles of range.
Mercedes, complaining of a “brutal” price war in the electric vehicle sector as demand lags behind the weakening economy, lowered its profit forecast to the lower end of its previous expectations, of 12 to 14%. In the United States, Mercedes is reportedly offering discounts of up to $10,000 to sell its electric vehicles.
HSBC Global Research was concerned about the “continuous and continuing” decline in Mercedes’ margin. This was linked to Mercedes electric car sales not meeting targets, and this could continue into next year.
“We believe that underlying weakness in BEV (Mercedes) demand could persist, particularly in the lull ahead of the launch of a series of new models from the end of next year,” he said. said HSBC Global Research in a report.
BMW overcame the problems by announcing higher profit margins in the third quarter following strong demand for its electric cars. Porsche said luxury markets were not immune to inflation and rising interest rates.
Bernstein Research said the outlook for the current quarter looked increasingly poor, as well as for 2024, in a report on automotive in the EU.
“The main sources of demand support – pent-up demand, order books and low inventories – have started to disappear in all markets, as have key headwinds such as higher financing requirements, higher residual value gains. low and year-end supply on-chain clearing has started to hit. For most of our covered (manufacturers), this largely translates into lower revenues and margins for the fourth quarter of 2023 and greater uncertainty for the first half of 2024,” Bernstein said.
Manufacturers’ pricing discipline was beginning to falter, with sales of electric vehicles particularly affected.
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“Mass market manufacturers have maintained a surprising degree of incentive discipline. However, with order books now heavily tilted towards the two to three month mark in Europe and increasingly negative comments from (manufacturers) on Q3/23 results, we expect a recovery discounts. For now, it is the demand for electric vehicles in the West that seems to have borne the brunt of this impact,” according to Bernstein.
Investment bank UBS subscribed to the scenario that current strong sales are about to be overtaken by underlying forces. Sales in Europe’s top five markets rose 14% in October, while year-to-date orders were often in negative territory, with France down 12% and Germany 21%.
“Demand for electric vehicles remains under pressure, with the share stable at 21% since August,” UBS said in a report.
UBS said downward pressure on manufacturers’ earnings per share in 2024 was increasing.
The German auto industry fears a deterioration in the economy, but perhaps not for long.
“Companies in the German automotive industry believe that their current situation is significantly worse than that of the previous month,” the IFO institute said in its November report.
“Expectations for the coming months have, however, improved slightly, although they remain very low,” the IFO said.