Filenews 29 November 2024
U.S. President-elect Donald Trump's threats to impose tariffs on imported goods are the new problem for investors in the European auto industry, adding to union strikes, factory closures, a slowing economy, competition with China and emissions.
Volkswagen will face major strikes as it looks to close factories in Germany to keep costs under control. Other major automakers are under the same pressure. Profits are being squeezed as the European economy slows and car sales stagnate, especially in the most important market: Germany.
There is, after all, the "conundrum" of electric vehicles. With controversial aspects. The EU's strict 'net zero' programme can be implemented between now and 2035, while at the same time the automotive sector can maintain its profits at a decent level. It seems difficult, but how will European automakers deal with imports of electric vehicles from China?
Some politicians and trade unions see the EU's CO2 emissions programme as an existential 'threat' to the car industry, a sector where millions of workers are employed and well paid. Environmental policy can shift the mainstream towards electromobility. How to prevent "self-harm"?
US tariffs: The "new unknown"
Now there is a "new unknown" – US tariffs. President-elect Trump is thinking aloud about his government plans, and the word "tariffs" is upsetting European investors who see their access to the wealthy U.S. market threatened. The same problem arose during Trump's first term. U.S. car imports to Europe were burdened by 10 percent, while the opposite route was burdened by just 2.5 percent. Nothing happened then, although restoring this imbalance would not have caused much disruption.
Ahead of Trump's second term, however, the tariff issue has taken on a more threatening dimension. Will Trump build a "tariff wall" around the US by imposing 20 or 25% tariffs on Europeans, as is currently the case with truck imports? The "tariff fence" to Mexico will be erected... As what percentage between 25% and 100%? According to investment firm Bernstein, 40 percent of the cars Volkswagen sells in the U.S. pass through Mexico, and Stellantis, respectively, 21 percent.
Berenberg Bank points out that BMW, with 66%, has the highest share of the US market in terms of sales of cars produced in the US, followed by Mercedes with 32%, with 57% of its imports from the EU and 11% from Mexico. VW produces 23% of its cars in the US. Audis, Porsches, Bentleys and Lamborghinis are 100% imported.
Investors may rest easy at the thought that the U.S. won't build a tariff wall if it jeopardizes the huge profits of Google, Apple, Microsoft and Amazon.
4 million sales per year missing
Sales in Western Europe in 2024 are expected to fall just over 1% to 11.43 million sedans and SUVs, according to GlobalData. It doesn't sound catastrophic, but since the pandemic crisis 4 years ago the market has lost 4 million sales per year. That is why many companies in the sector are struggling with their financial figures. Their factories are built for much more production, and this undermines the profitability of everyone – except the Chinese.
For 2025, GlobalData expects sales in Western Europe to grow by 2.4%.
"Ongoing economic and political challenges in the region are undermining consumer confidence and new vehicle sales are slowing. While monetary policy easing and the production of new models will provide some stimulus to the market in 2025, headwinds will continue to act as a drag on vehicle sales," GlobalData said in a report.
Investment bank UBS expects sales across Europe to rise 2% to 13.7 million. Western Europe includes all major markets such as Germany, France, Britain, Italy and Spain.
"The sector's earnings momentum is likely to remain negative in the coming quarters. With share prices down about 20% in the last quarter, investors are clearly cautious and believe it is too early to have clearer signals about the market's trajectory," UBS said in an analysis.
Not everyone has a negative attitude, though. Morgan Stanley sees some potential for good performance, at least for investors.
"We are reviewing our outlook for the industry from 'Cautious' to 'In-Line' and will closely monitor manufacturers' margins. The pressure from the Chinese automaker will intensify, but the underperformance of the sector is lowering the valuation bar and stocks are becoming cheaper," said Morgan Stanley, which upgraded BMW to "overweight" and "likes" Mercedes.
UBS said 2025 could be the most uncertain year for automakers, especially in Europe. EU environmental rules are under criticism, the risks of U.S. tariffs loom, and Volkswagen will face strikes in December, while other manufacturers are rumoured to be planning major restructurings.
Performance – editing: Michalis Papapantonopoulos
