European Auto Industry Holds Ground Against Rising Chinese Rivalry

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The familiar English adage “There’s many a slip between cup and lip” suggests caution against pinning hopes on uncertain outcomes, implying that the Chinese automobile sector hasn’t yet dominated Europe’s automotive industry as foreboded. At face value, the European industry appears robust with escalating forecasts of sales growth. However, sustaining optimism amidst the predicted surge of Chinese competition demands staunch resolve.

Sensational narratives about an imminently approaching onslaught led by BYD, China’s Build Your Dreams, Great Wall Motors, Geely, and state-owned SAIC brands dominated the recent IAA Mobility auto show held in Munich. Although these brands could become critical threats in the future, such a realization is still hovering beyond immediate sight.

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Concurrently, LMC Automotive revised its sales growth forecast upward for Western European sedans and SUVs in 2023, predicting 10.7% growth, equating to 11.23 million units, a rise from the previous month’s 9.4% forecast. By comparison to the 14.3 million units sold in 2019 before the Covid-19 pandemic, this adjustment seems modest. However, it intimates that a post-pandemic ‘normalcy’ could accommodate diverse competition, inclusive of the Chinese producers renowned for efficiency and competitive pricing.

As per LMC auto industry’s statement, “despite the formidable macroeconomic challenges confronting various nations, typified by high interest rates and restrained economic growth, our core assumption presumes growth, underpinned by backlogs and a low base in 2022.”

The German economy, distinguished as Europe’s largest, hovers on the brink of a recession. However, keen observers believe a rebound won’t be indefinitely delayed. The recent downward adjustment by the IMF of Germany’s real GDP growth forecast for 2023 to -0.3% hints towards an impending upturn. Moreover, S&P Global Mobility foresees demure escalations in German sedan and SUV sales to 2.8 million in 2023, a slight increment from last year’s 2.7 million.

European automobile makers recorded considerable profits in the first half of 2023, which is predicted to face competitions in the backdrop of easing supply chain bottlenecks, affordability, and cumulating concerns over demand, as rendered by Germany’s Berenberg Bank. Despite an indication of the advent of Chinese imports, their impact on net profits is projected to be negligible.

Notwithstanding the testing sustainability of sector margins due to the confluence of challenges like peaking average selling prices, rising demands, inventory resurgence, burgeoning competition, restrictive retail credit markets, and persisting cost inflations – Berenberg Bank remains optimistic. Following substantial gains in profitability, the impact is projected to be minimal, with manufacturers’ earnings in 2024 and 2025 dipping by a paltry average of 5%.

While initial financial results for the first half disclosed encouraging progress for mass-market automotive players like Renault and Stellantis, Volkswagen appeared beleaguered, particularly evident in the dismal performance of its electric models. Despite this, Auto Forecast Solutions remains hopeful for sales in the European Union and predicts a moderate uptick in Germany by 2024.

As the automotive industry transcends the downturn of 2020, the recovering sales in sedans and SUVs across the EU are expected to bolster growth by 14.1%. This figure signifies a pivotal milestone in the re-emergence of the sector despite remaining below the 13 million vehicles sold in 2019. Germany is anticipated to surpass the threshold of 3 million units next year.

In its evaluation, UBS Investment Bank flagged the potential peril of European car manufacturers eschewing disciplined operations and reverting to tactics that favor sales over profitability. As supply chain bottlenecks subside – giving way to burgeoning production and eroding price control – UBS predicts that revenues may soar while margins dwindle. It envisions falling margins across all manufacturers as oversupply becomes increasingly apparent and competition intensifies, advancing its preference of luxury over premium over mass-market manufacturers.

European car makers are keeping a wary eye for concrete markers of China’s impending electric threat. They remain optimistic that the initial success of SAIC may be driven by the recognition of its MG subsidiary, and that it may prove more challenging for pricier electric models bearing names like Xpeng, Zeekr, BYD, Aiways, Nio, Ora, and Maxus to carve a niche in Europe, even if they are $10,700 (~€10,000) cheaper. If their competition strategy falters, there’s always the possibility of levying EU tariffs, or alternatively, European manufacturers may raise their game to match the Chinese, in terms of price, quality, and battery technology.