The European auto industry is bracing for a challenging period as growth in car sales begins to taper off, squeezing profits and forcing manufacturers to confront over-capacity issues that may lead to plant closures. The situation is compounded by looming 2025 European Union regulations on carbon dioxide emissions, which will demand stricter compliance and further stress the market.
European Union tariffs slow the influx of Chinese-made electric vehicles in July, as the bloc moves to protect its auto industry from low-cost competition https://t.co/X6QDdoiPkn via @business
— Jeff Siegel (@jeffsiegel) August 16, 2024
Auto manufacturers are now tasked with selling more electric vehicles (EVs), which are less profitable and less in demand compared to traditional internal combustion engine vehicles. This shift is likely to reduce overall sales of the more profitable vehicles that consumers prefer, creating a difficult balancing act for the industry.
HSBC Global Research has highlighted that major players like Volkswagen and Renault are particularly at risk, while BMW and Volvo are in a somewhat better position. Last year, the Western European market saw a 13.9% surge in sales, reaching 11.56 million vehicles, which allowed manufacturers to raise prices and enjoy higher profits. However, the market momentum has slowed significantly this year, and projections for the near future are bleak.
GlobalData, which tracks industry trends, has repeatedly lowered its sales forecast for Western Europe. Initially expecting nearly 5% growth, their latest update suggests a meager 0.2% increase, with total sales expected to peak at 11.58 million vehicles. This region includes the major markets of Germany, France, the UK, Italy, and Spain.
Several factors are contributing to the sluggish market activity. High-interest rates persist despite initial moves to loosen monetary policy, and vehicle pricing remains elevated. Even though the supply chain issues that previously drove up prices have largely been resolved, prices have not seen significant reductions. Additionally, the EV market, once seen as a growth area, is losing momentum.
And it gets worse for European car makers: a collapse of the sales numbers in China https://t.co/ei9aQfvBwF
— Patrick Slavenburg – Decision intelligence (@patrick_s_smart) August 9, 2024
BMI, a Fitch Solutions company, predicts that overall European market growth will slow to 4.6% in 2024, down from a robust 19.2% in 2023 when carmakers were catching up on backlogs caused by supply chain disruptions.
The deteriorating market conditions are expected to weigh heavily on manufacturers’ profit margins throughout 2024. UBS has warned that these challenges will continue to press down on operating profits for the remainder of the year.
Looking ahead to 2025, HSBC Global Research suggests that potential penalties for failing to meet EU emissions targets could cost manufacturers as much as €5 billion, with Renault cautioning that the penalties could be even higher. While Volkswagen and Renault are racing to launch new EV models in the latter half of 2024 to bridge the gap to compliance, the success of these models will be critical in meeting emissions targets. Meanwhile, Mercedes and Stellantis are also better positioned but remain vulnerable if EV demand continues to falter.
In response to these challenges, Volkswagen has been cutting costs by reducing headcount and closing plants. However, German forecaster IFO Institute has noted that the auto industry is slipping further into crisis. Capacity utilization has dropped to 77.7%, well below the long-term average, and export expectations have significantly declined.
Key Points:
- European auto sales are stagnating, pressuring profits and prompting manufacturers to consider capacity reductions.
- The 2025 EU emissions regulations are set to further challenge the industry, necessitating an increase in sales of less profitable electric vehicles (EVs) while reducing the sales of more profitable internal combustion engine vehicles.
- Volkswagen and Renault are particularly vulnerable to these market shifts, whereas BMW and Volvo are better positioned.
- Sales forecasts for Western Europe have been revised downward, with minimal growth expected for the remainder of 2024 and into 2025.
- German auto industry indicators are worsening, with declining capacity utilization and export expectations signaling deeper industry challenges ahead.
Fallon Jacobson – Reprinted with permission of Whatfinger News
