Who’d be a shareholder in a Recession that Threatens European automotive manufacturers? It’s not a compelling case to say the best they can hope for is that 2023 won’t be as bad as forecasters recently reckoned.
The industry is in the throes of massive uncertainties as it scrambles to prepare for the electric revolution. Sales are still nowhere near reaching 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, down just under 10%, but because of peculiar circumstances profits were mainly strong. Next year a recession is expected, led by Germany. Despite this, sales are predicted to bound ahead by slightly more than 10%, but profits will be under pressure.
Unique circumstances boosted profits in 2022. Supply chain chaos and bottlenecks leading to restricted supplies forced many Recession auto giants to restrict sales. Many opted to sell only those vehicles with the biggest profit margins and that paid off big. Expect that to end in 2023.
One fact helps to explain these conflicting scenarios. Over the last 3 years, sales in Western Europe have been fairly steady between 10.8 million in 2020 and 9.99 million in 2022, according to Recession LMC Automotive. But these outcomes look poor compared with the pre-coronavirus tally of 14.29 million in 2019. Much of the industry’s production is still geared toward meeting a Western European market of about 3 million a year bigger than the “improvement” expected next year. That’s not good for the bottom line.
Germany, Europe’s biggest economy, is expected to slide into a recession in 2023, but it won’t 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 anticipated, with economic output shrinking by only 0.1% in 2023,” the Munich-based forecaster said in a report.
In the fall, the IFO was expecting a fall of 0.3% in 2023. It now expects growth of 1.6% in 2024.
Investment bank Morgan Stanley describes the 2023 outlook for European Recession auto manufacturers as “more complex than ever”. It sees lower economic growth but low inflation, as auto stock prices decline along with profit margins. Sales of premium manufacturers like BMW and Mercedes might fall faster from all-time highs than mass-market vehicles, while record upmarket profit margins might also be under pressure.
“We had been hoping to be more constructive going into 2023, but many of the 2022 fears that had depressed European auto valuations for most of 2022 – war, gas supply risks, China COVID restrictions – have been reversing in recent weeks, reducing the sentiment and valuation upside from here. We believe the auto downcycle has not even started,” Morgan Stanley said in a report.
“Just as autos (stock prices) have rallied almost 20% off the lows, we feel the downside sentiment risks are greatest as the impact of the 2022 rate hikes on the economy, car sales, and car pricing become clearer,” the report said.
The report added confirmation of a global recession is awaited, which would sharply lower autos’ profit prospects in the first half of 2023.
Last week, the U.S., European Union, and British 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 granted all car manufacturers unprecedented pricing power – both in the premium end and mass-market segments. Facing economic uncertainties, the investment horizon in the sector has contracted from two to three years, to what feels like days in the last weeks of 2022,” the investment researcher said in a report.
The industry and its shareholders face big problems as full production is restored. It has to figure out a big imponderable; how quickly must it embrace electric vehicles and will this revolution lead to any corporate failures?
“As production ramps back up, understanding where, when, and how much pain (manufacturers) will feel will preoccupy markets 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 (manufacturers) 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 Recession Automotive predicts Western European sales in 2023 will jump 9.4% to 10.93 million compared with 2022’s 9.99 million. A month ago, LMC was forecasting an increase of 11.1% to 11.01 million. Western Europe includes all the big markets like Germany, France, Britain, Italy, and Spain.
LMC agreed that supply constraints which allowed strong prices and inflated profits in 2022 won’t continue.
“For 2023, we assume these bottlenecks will ease as the year progresses. However, the demand side is also fraught with headwinds including high inflation, falling consumer confidence, stretched household budgets, and tighter monetary policy. We assume 2023 will comfortably outpace 2022 though we are a little more cautious than last month as we balance the ongoing risks to both supply and demand,” LMC said in a report.