European auto manufacturers face a big hit to their businesses as recession looms and inflation eats away at consumer confidence, while threats to world peace also undermine the desire to buy a new car.
What might look like a small fall in sales will translate into a bigger hit on profits.
The U.S. is also facing a threat to sales. China will bound ahead this year and face a decline in 2023.
Sales forecasts for Western Europe are being shaved rather than slashed, with investment bank UBS forecasting a 1.4% fall this year to 12.3 million cars and SUVs, while next year should remove another 2.6% as sales slip to 12.0 million.
Industry analysts seem reluctant to dial down their sales predictions for despite fears that energy shortages may force European lights to go out and factories to shut. Recent worries had pointed to the trashing of European disposal incomes because of massive increases in the price of domestic energy. Governments have unveiled huge subsidies to not only bail out their poorest but also to make sure there is enough spending power to keep economies afloat.
Reuters’ BreakingViews column said this problem is going to be around for a while, despite tough government action.
“The energy squeeze is a multi-year problem which will make Europe poorer and less competitive while saddling the region with higher public debt. Dealing with this at the same time as tackling inflation will cause ructions which will cascade down the years,” BreakingViews columnist Hugo Dixon said in mid-September.
Manufacturers will find this frustrating as many have found 2022 sales extremely profitable. This is because the big backlog in sales generated by the shortage of semiconductors has forced companies to forsake the pursuit of volume and concentrate on high-profit margin vehicles.
U.S.-based AutoForecast Solutions sums up deteriorating conditions like this.
“Markets around the world are trying to fight off the expected downturn. With global inflation running higher than economists would prefer, slower sales across many industries have raised the specter of a recession. While the automotive sector is at low points in North America and Europe, especially in Eastern Europe, a strong recession could hurt them further,” AutoForecast Solutions said in its October report.
Fitch Solutions Country Risk & Industry Research said Europe as a whole will now be the worst performing region in 2022, with sales down 10.8%, not least because of the Russian invasion of Ukraine. UBS puts the decline for the whole of Europe at minus 6.8% and 15.6 million vehicles and recovering to minus 2.4% next year and 15.2 million. Western Europe includes all the big markets of Germany, France, Britain, Italy and Spain.
UBS says U.S. auto sales will fall 4.5% in 2022 to 14.4 million, and remain the same in 2023. China sales will advance 4.8% to 24.9 million in 2022 and slip 3.0% in 2023.
Investment researcher Bernstein says European profits are in jeopardy.
“These risks threaten the industrial and financial services margins of (manufacturers), even as companies accelerate their electrification programs. This leads us to favor premium and luxury brands that enjoy higher and more resilient margins,” Bernstein said in a report.
UBS said economic conditions will cut auto sales in 2023 in all major regions, with the prospect disappearing of a recovery based on improving chip supply after two 2 years of bottlenecks. The investment bank cut its global light vehicle production forecast for 2023 by 3 million to 82.6.
“We expect the auto market to switch from under to over-supply, with a substantial negative impact on (manufacturers) pricing power and margins. We already cut estimates for manufacturers’ earnings per share by 30% across the board, but the downside case for price/mix could be even worse after an about 10% net gain in pricing power since the first half of 2020 could be at risk,” UBS said in a report.
“EV and premium/luxury cars in general should show the highest demand and pricing resilience. We’ve also updated our EV model, with lower absolute numbers for the struggling European car market but a strong growth perspective for the U.S. because of the new tax credit,” UBS said.
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October 05, 2022 at 06:16PM
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European Auto Industry Faces Sliding Sales, But Bigger Hit To Profits - Forbes
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