Amid global clashes, automotive stocks are crashing
Stellantis – a galaxy of 14 brands, including Peugeot, Alfa Romeo, Chrysler and Maserati – has seen its share price plunge by 40% (as of 3 October) since the start of the year! BMW is down 19% and Volkswagen 12%. Unfortunately, these are not isolated cases: the European automotive sector as a whole has tumbled by 8%. Meanwhile, the broad-market MSCI Europe Index is up by more than 10%.
The wheels are coming off the European auto industry. But why? A host of reasons, to be frank. First and foremost, sales of fully electric vehicles have been disappointing – they’re falling instead of rising. According to the European Automobile Manufacturers’ Association (ACEA), new registrations of fully electric vehicles in Europe dropped by 18% by the end of August year on year. By that date, they had accounted for just 14.4% of total sales for the year, a significant drop from the 21% recorded over the same period last year. While it’s true that the share of non-rechargeable hybrids has increased, their significantly higher carbon footprint means they’re unlikely to represent the future of the automotive industry. Consumers remain hesitant to fully embrace fully electric vehicles for now. There are many reasons for this reluctance, and they create structural obstacles to the shift towards electrification: technical challenges, such as battery life and repairability; financial concerns, including depreciation in the secondary market and weak tax incentives; and practical issues, like the convenience of charging.
Car manufacturers have also been hit by a wave of challenges, each with its own specific difficulties. Stellantis, for example, has struggled to manage an inventory overhang in the US, while BMW’s recall of 1.5 million vehicles due to braking issues will weigh on its margins through the end of 2024. These types of problem do not necessarily have to be serious, as long as they remain infrequent. Still, they raise important questions about the quality of management across the industry.
At the same time, the stringent CO2 emissions standards set by Europe for 2025 — not to mention the all-electric target for 2035 — are generating panic among some manufacturers and sparking severe internal conflicts. For example, the ACEA, chaired by the CEO of Renault, called for a temporary delay in rolling out the new standards, arguing they were unworkable in the short term. This request was promptly dismissed as “surreal” by Stellantis CEO Carlos Tavares. How can companies develop reliable production plans in a climate of regulatory uncertainty? And how does this motivate consumers, uncertain about the future regulations that directly impact the future value of their cars to go out and buy a new vehicle?
On top of this, the sector has become a casualty of China’s efforts to rekindle its growth and strengthen its global industrial ascendancy. China, struggling with stagnant domestic growth but seeing commercial success with its electric vehicles, has made aggressive moves to capture European market share, often at the expense of local manufacturers. In response, Europe has started paving the way for the imposition of import tariffs of up to 45% on certain manufacturers considered to be excessively subsidised by their governments. While China is the main target, Tesla could also be affected. These defensive manoeuvres amount to a delicate balancing act: as Germany has pointed out, Beijing could retaliate by imposing tariffs on European goods, turning this into a lose-lose situation.
In such a fiercely competitive global car market, the future of the European sector is murky. The silver lining is that the core issues have now been clearly identified. This recognition is the first step towards the crucial reinvention the industry has proven capable of in the past. There’s every reason to believe it can rise to the challenge once again. The market may eventually reward these efforts, but Europe will have to shift into high gear to make it happen.
Final version of 4 October 2024 – Alexis Bienvenu, Fund Manager, LFDE