It’s a great time for Europeans wanting to buy a new car, particularly an electric one.
The car market is growing but this outward sign of success masks a weakening environment for manufacturers. Supply chain interruptions have been repaired and new cars are hitting markets thick and fast. This is forcing down prices and will hit industry profit margins later this year.
The ending of government subsidies on battery electric vehicle (BEV) purchases in important markets like Germany will stall recent rapid growth. This means some manufacturers will need to reignite BEV sales to meet EU CO2 quota regulations. They will need to slash prices to move the metal.
Investment bank Morgan Stanley brings up a couple of new plusses and minuses for BEV buyers and positives for tire makers – excess tire wear – mitigated by regenerative braking’s positive for brake life.
GlobalData has raised its sales forecast for Western Europe again. The forecast now is for an 11.8% gain to 11.34 million in 2023. In September it expected a 10.7% gain, and in August 9.4%.
GlobalData said economies across Western Europe, including the five biggest markets Germany, France, Britain, Italy and Spain, still face challenging conditions with high inflation and financing costs. The forecast of 11.34 million sales is about 3 million short of 2019’s pre-Covid level.
Steve Young, managing director of British-based automotive retailing consultancy ICDP said consumer demand for BEVs is fragile.
“Reports I hear from most markets are that retail customers will only buy BEVs if they are heavily incentivized, normally through government-funded schemes. Where these are reduced or removed, as they have been in the U.K., (and Germany, Norway and Sweden) retail customers choose cheaper ICE (internal combustion engine) cars than the BEV alternative,” Young said in his weekly blog.
“Private buyers who are putting their own money into a car are nervous about technology change that may affect the desirability and residual value of the BEV they buy now, are deterred by stories of weaknesses in charging infrastructure, and remain fixated on their occasional 400 km (250 mile) trip which may be more inconvenient in a BEV than an ICE car,” Young said.
The maximum German government subsidy was €4,500 ($4,800) on a BEV costing less than €40,000 ($42,500). That has now ended, and many sales were brought forward to take advantage.
European manufacturers are about to report solid third-quarter earnings before succumbing to profit pressures in the fourth quarter. According to investment bank UBS, Volkswagen may cut its profit projection for the year.
“Q3 earnings season should still deliver overall solid results even though (manufacturers) margins will sequentially decline, and EV-exposed suppliers will soon feel the low demand. Full-year guidance looks increasingly ambitious for VW,” UBS said in a research note.
“Attractive leasing offers and price cuts for EVs are also observable in Europe, and we expect to see more of these in the coming months. ICE demand is holding up better but also with rising incentives and a weaker mix, according to our checks” UBS said.
UBS said VW may have to dilute its profit margin target for 2023 of 7.5 to 8.5%, while premium operators like Mercedes (12.4%), BMW 10.0%) and Porsche (17.1%) will hold steady.
HSBC Global Research is slightly more optimistic, saying markets are not as bad as feared.
“The state of auto demand is still obscured by pent-up demand and backlogs, but increasingly it seems the earnings collapse that many feared might never arrive. Pricing worries don’t seem to be materializing, but notably the ability to pass through higher costs seems to have diminished. When they arrive, raw material headwinds may help margins, as to the slow adoption of BEVs,” HSBC said in a report.
Meanwhile, the demand for electric cars is expected to pick up again in 2024. Schmidt Automotive Research forecasts Western European sales hitting 2.7 million in 2025, and 9.2 million in 2030.
But investment bank Morgan Stanley points to another unexpected negative looming for BEV buyers, excess tire wear. Negative for consumers, but of course a big plus for tire makers.
“Recent fleet data from Epyx appears to suggest that tires fitted to electric vehicles may be achieving 25% fewer miles before requiring replacement. Further data is clearly needed to confirm this trend, but a shorter replacement cycle for BEVs could be bullish for tire stocks over the long term,” Morgan Stanley said in a report.
More wear on the tires means more environmental damage from the worn bits, but BEVs also mean less wear on brakes.
“If tire wear rates on BEVs are higher, pollution may also be higher, albeit tire pollution (and brake wear) can be materially offset by regenerative braking,” Morgan Stanley said.
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