European car manufacturers in a perfect storm
German and European car manufacturers are caught in the dilemma of high production costs for e-cars coupled with stagnating demand for e-cars, growing (subsidized) competition from China and political goals that are leading to the end of their reliable margin generator: the combustion engine.
The Stoxx Europe Automotive has lost around 9.6% since the beginning of the year and is the weakest sector in Europe so far this year. In the same period, the Euro Stoxx600, for example, has gained over 8.8 percent and the MSCI World even 17.3 percent (as at 28.10.24). With regard to German car manufacturers (OEMs), analysts expect an average profit slump in the high double-digit range for the current year compared to 2023. Almost all European car manufacturers have had to significantly revise downwards the targets they had set themselves at the beginning of the year.
The German OEMs are in a dilemma. They hardly earn any money with their electric cars, unlike with their combustion models - the margin is too low. On the cost side, on the other hand, they cannot even begin to keep up with the partly subsidized Chinese competition - production is too expensive. The industry is looking for an appropriate price premium for Western brands, as the current difference appears to be far too high. The result is a considerable loss of market share, as experienced by German car manufacturers. According to the German Association of the Automotive Industry (VDA), the market share of German OEMs in China fell to 20.3% in the first half of the year, a drop of 2.1 percentage points compared to the previous year and almost six percentage points lower than in 2019.
Turning point in China
In China, on the other hand, consumers are highly unsettled due to the tense macro situation. This is not only evident in car sales and pricing, but also in various other sectors such as the luxury goods segment. However, the weakness in China's automotive sector is multidimensional and, in our opinion, not only cyclical, but above all structural.
The word "turning point" seems appropriate for China's automotive market. Firstly, there is the obvious, disruptive move towards e-mobility. As a result, European OEMs have lost much of the technological lead they have built up over decades in the heart of the car - the powertrain. The largest Chinese car manufacturer BYD recognizes the technological lead of European OEMs in combustion engines, but considers them uncompetitive in e-cars. Chinese consumers were or are willing to pay a significant premium for Western combustion models - but they are not willing to do so for Western e-cars.
Secondly, the attitude of Chinese consumers has also changed in recent years, which is reflected in their purchasing behavior. European OEMs are lagging far behind the current industry leader BYD and are "only" on a par with other Chinese manufacturers such as Xiaomi, Li Auto, Geely or Aito. The Chinese seem to have developed a preference for Chinese cars. In addition, the communist government is promoting a so-called "luxury shame": Chinese people are supposed to turn away from Western luxury or feel ashamed if they flaunt it. This naturally affects the manufacturers of luxury and luxury class models. Porsche has reacted accordingly to the weak sales by halving the number of Chinese dealers - a clear sign that they do not expect a recovery in the near future. Mercedes is currently supporting its dealers financially, but cuts to the dealer network are also being discussed there.
Stagnating electrification
Global sales figures for e-cars (all-electric and hybrid) still grew faster than the overall automotive market in the first half of 2024, but with an increase of just seven percent, they have lost a lot of momentum compared to the 22% in the same period last year. The situation in Europe (plus one percent) and especially Germany (minus nine percent) is even more pronounced. The slump in German e-car sales figures can be partly explained by the discontinuation of state subsidies. But not only that.
Another issue is the lack of charging infrastructure - in a survey (Allensbach, Oct. 2023), 68% of respondents stated that they consider the availability of charging facilities in their own area to be "less good" or "not good at all". The situation on freeways and country roads was rated as only slightly better (49% critical and only 7% positive). In addition, the German government is lagging far behind its target of providing one million publicly accessible charging points by 2030 when it comes to expanding the charging infrastructure. There are currently (as of September 2024) 146,000 charging points in Germany. To achieve the target, the rate of expansion would have to more than double. In Europe, the situation varies from country to country - the Netherlands and Norway, for example, are much further ahead in terms of charging infrastructure. Another factor that should not be underestimated is the (expected) progress in battery technology, which could have a significant impact on ranges and charging frequencies. Looking ahead to the next decade, the market is expecting significant advances in solid-state batteries, especially from Asian and US manufacturers. So potential e-car buyers tend to wait and see.
EU emission targets for 2025
In the short term, the faltering e-car sales in Europe come at an inopportune time, considering the stricter CO2 emission targets that are to apply throughout the EU from 2025. The EU is requiring car manufacturers to reduce fleet emissions by a further 15 percent compared to the 2021 targets. This further complicates the situation for some manufacturers. Mercedes, for example, is still at an average of 108g/km in the first half of 2024 and would have to achieve around 90g/km in 2025. The new EU targets are not just on paper, but are subject to considerable penalties for non-compliance. An example calculation: with around 660,000 cars sold in Europe (2023) and unchanged CO2 emissions as described above, a fine of over one billion euros would be due. To meet the targets, it would be important to sell more e-vehicles. But the market is stagnating. The manufacturers concerned will presumably control incentives via discounts, which is likely to further damage margins. Stellantis, owner of a broad range of brands, including Fiat, Opel, Peugeot and Jeep, recently announced that it would reduce combustion engine production from 2025 in order to meet the EU CO2 fleet targets.
Battery cost factor - a vicious circle with its own dynamics
Compared to a combustion engine, the electric car has a decisive cost disadvantage: according to the statistics office Statista, the battery will still account for around 28% of the production costs of an average electric car in 2024. These costs do not apply to combustion engines. German and European OEMs have confirmed these costs, and thus the main reason for the margin difference, in our company discussions. Battery prices are currently falling, which is providing welcome cost relief. Battery prices (measured in euros or US dollars per kWH) are expected to continue to fall sharply over the next few years. The investment bank Goldman Sachs predicts that the cost per kWh should fall by almost 50 percent between 2023 and 2026. This development is both a blessing and a curse: on the one hand, it is a healthy development that makes e-mobility more affordable. On the other hand, it also brings with it considerable uncertainty in the present: why should consumers buy an electric car with an expensive battery today if they can get it much cheaper in a few years' time? So sales are stagnating. This forces manufacturers to offer discounts, which in turn discourages potential buyers who are concerned about the resale value.
Helpful and helpless measures
The European automotive industry and politicians are desperately looking for ways out. Many car manufacturers have introduced tough cost measures. The EU has raised punitive tariffs on imported Chinese vehicles and some countries are also discussing support measures such as a new scrappage scheme. However, the situation is precarious for German OEMs, especially because China remains one of the most important sales markets. This makes extremely tough measures, such as those imposed by the USA with 100% punitive tariffs on Chinese e-cars since September 2024, almost politically impossible. Even more restrictive punitive tariffs would only help to a limited extent, as BYD, for example, is currently building a large plant in Hungary with a potential capacity of 300,000 cars per year, which would correspond to almost four percent of car sales in the EU. Other examples include Leapmotor (Hong Kong), which is building the T03 small car in Poland, and of course Tesla's plant in Grünheide.
German and European car manufacturers are thus being squeezed, and the competitive situation in Europe is likely to intensify even further, as we believe the Chinese car tsunami is still to come. Even if the valuations of shares in the industry are pricing in a great deal of negativity, we believe that the share prices of European OEMs have not yet bottomed out and remain cautious for the time being.
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