Recession threatens Europe’s carmakers, but hopes for a mild downturn are reviving | Popgen Tech
Who would be a shareholder in a European car manufacturer? It is not a compelling case to say that the best they can hope for is that 2023 will not be as bad as forecasters have recently reckoned.
The industry is in the throes of massive uncertainties as it scrambles to prepare for the electrical revolution. Sales are still nowhere near pre-coronavirus levels. Premium manufacturers’ profits and sales are likely to suffer more than those operating in the mass market, according to analysts.
In 2022, the likes of BMW, VW, Mercedes, Stellantis and Renault operated in a very weak market, just under 10%, but due to peculiar circumstances, profits were mainly strong. A recession is expected next year, led by Germany. Despite this, sales are forecast to advance by slightly more than 10%, but profits will be under pressure.
Unique circumstances boosted profits in 2022. Supply chain chaos and bottlenecks leading to limited supplies have forced many auto giants to curtail sales. Many chose to sell only those vehicles with the biggest profit margins and it paid off big. Expect it to end in 2023.
One fact helps explain these conflicting scenarios. Over the past 3 years, sales in Western Europe have been fairly steady between 10.8 million in 2020 and 9.99 million in 2022, according to LMC Automotive. But these outcomes look poor compared to the pre-coronavirus tally of 14.29 million in 2019. Much of the industry’s production is still geared to meet a Western European market that is about 3 million a year larger than the “improvement” expected next year. This is not good for the bottom line.
Germany, Europe’s largest economy, is expected to fall into recession in 2023, but it will not be as bad as some economists have predicted, according to the IFO Institute for Economic Research.
“The recession expected to hit Germany this winter will be milder than previously expected, with economic output shrinking by just 0.1% in 2023,” the Munich-based forecaster said in a report.
In the autumn, the IFO expected a drop of 0.3% in 2023. He now expects growth of 1.6% in 2024.
Investment bank Morgan Stanley describes the 2023 outlook for European car manufacturers as “more complex than ever”. It sees lower economic growth but low inflation as auto share prices fall along with profit margins. Sales of premium manufacturers such as BMW and Mercedes may fall faster than all-time for mass-market vehicles, while record upmarket profit margins may also come under pressure.
“We had hoped to be more constructive in 2023, but many of the 2022 fears that weighed down European auto valuations for most of 2022 – war, gas supply risks, China COVID restrictions – have reversed in recent weeks, which has dampened sentiment reduced and valuation upside from here. We believe the car down cycle has not even begun,” Morgan Stanley said in a report.
“Just as autos (stock prices) have rallied nearly 20% from the lows, we feel the downside sentiment risks are greatest as the impact of the 2022 rate hikes on the economy, auto sales and auto prices becomes clearer,” the report said. .
The report added that confirmation of a global recession is awaited, which would sharply lower auto profit prospects in the first half of 2023.
Last week, the US, European Union and UK authorities raised interest rates again.
Bernstein Research said the European industry is in the process of undergoing multiple, massive strategic changes.
“At the same time, external supply constraints have given all automakers unprecedented pricing power – both in the premium end and mass market segments. Facing economic uncertainties, the investment horizon in the sector has shrunk from two to three years, to what feels like days in the final weeks of 2022,” the investment researcher said in a report.
The industry and its shareholders face major problems as full production is restored. It must invent a great disengagement; how fast should it embrace electric vehicles and will this revolution lead to any corporate failures.
“As production ramps up, understanding where, when and how much pain (manufacturers) will feel will keep markets busy in early 2023. Next year should also see more details as the next generation platforms emerge, giving consumers and investors more insight into the future EV and software capabilities of (manufacturers). “Further global decoupling will put (manufacturer) risks and opportunities in individual markets more in the spotlight as investors try to discern the shape of the recovery,” Bernstein said in a report.
Meanwhile, LMC Automotive forecasts that Western European sales will rise 9.4% to 10.93 million in 2023 compared to 2022’s 9.99 million. A month ago, LMC predicted a rise of 11.1% to 11.01 million. Western Europe includes all the major markets such as Germany, France, Britain, Italy and Spain.
LMC agreed that supply constraints that enabled strong prices and inflated profits in 2022 will not continue.
“For 2023, we assume that these bottlenecks will ease as the year progresses. However, the demand side is also fraught with headwinds, including high inflation, declining consumer confidence, stretched household budgets and tighter monetary policy. We assume 2023 will comfortably outpace 2022, although we are a bit more cautious than last month as we balance the ongoing risks to both supply and demand,” LMC said in a report.