Poor Financial Results Will Make Automotive Industry Vulnerable To Predators

The automotive industry is braced for a round of poor financial results that will spook shareholders and probably spur the long-postponed shakeout, where no-hopers finally succumb to reality under pressure from digital world interlopers.

And if that doesn’t do it, European Union (EU) rules coming into force next year might be the catalyst as regulations to force its citizens into electric cars they don’t want will induce a tsunami of red ink on to all but the strongest bottom lines.

As investors brace themselves ahead of second quarter financial results, analysts are hurrying to cut their forecasts of global sales, led by weakness in China and the U.S.

Fitch Solutions has switched its global forecast to a slight 0.1% decline in 2019 after previously forecasting growth of 1.3%. This includes a prediction that U.S. sales will slip 2.0% but China is taking the biggest hit with a fall of 5.7% after a previous prediction of minus 1.5%.

As for Europe, stagnation is currently the watchword. Fitch Solutions sees a 0.8% fall in 2019. The European Automobile Makers Association, known by its acronym in French, ACEA, now expects EU sales to slip 1% to just over 15 million, revising down its previous forecast of plus 1%.

ACEA thought this was no big deal.

“Aside from the uncertainty due to Brexit and changing macroeconomic conditions, this represents a natural stabilization of the market,” ACEA Secretary General, Erik Jonnaert said.

“Indeed, the pace of growth has been slowing down in recent years,” he said.

Professor Stefan Bratzel, director of the Center of Automotive Management (CAM) in Germany thinks it’s a bit more serious, predicting a 5% fall in global sales, leading to disappearing profits, lower stock market valuations, cost cutting, austerity programs, and mergers. Bratzel said the industry is being hit by a double whammy – falling profits at a time when huge investments are required to fund upcoming electric vehicles.

It appears few buyers will want electric vehicles unless a government subsidy is offered.

Bratzel said the trend established in 2019’s first quarter, where the earnings before interest and profit (EBIT) margin of the biggest automakers fell to an average 3.4% from 5.3% in all of 2018 and over 6% in 2017’s first quarter, will intensify in the second quarter, and last for some time.

“While Daimler, Toyota, GM and Volkswagen still achieve returns of between 7.1 and 6.4% thanks to cost cutting programs, BMW, Honda and Nissan are already below 3%. It is expected that profits will level off at a lower level over the next few years,” CAM said in recent report.

“Car manufacturers must maintain the enormous costs of new technologies and business models such as electromobility and autonomous mobility services in order to remain viable despite overall lower profits. In doing so, they have to compete against new competitors in the field of e-mobility, the mobility service providers and the digital world,” CAM said.

As for the prospects for mergers, consolidation and take-overs, investors expect Renault and Fiat Chrysler Automobiles (FCA) to revive their stalled merger talks, while PSA Group, thwarted in its rumored desire for its compatriot Renault by FCA, is said to be looking at ailing Jaguar Land Rover. Meanwhile, as financial reports appear later this month, expect profit warnings to be a recurring theme.

CAM director Bratzel predicts a battle will start between the traditional players and upstart digital operators.

“The transformation of the automotive industry is increasingly developing into a battle of the worlds between the established automobile manufacturers, new mobility service providers and major digital players. Because of the enormous investments required for new technologies, there is a growing need for multiple collaborations between established manufacturers and digital players,” Bratzel said.

“In the next 10 years, there will be further consolidation in the industry,” Bratzel said.