European Car Sales Are Strong, But Beware Disruptors Like Interest Rates, Tesla

Healthy sales of sedans and SUVs in Europe are expected this year but a gathering storm of negatives looks likely to undermine profits, including worries that a diminishing supply of credit might inhibit buyers and weaken the economy, while Tesla’s electric car price war is also forcing manufacturers generally to slash margins.

“Tesla has triggered a price war in EVs that will have industry-wide consequences. (Mainstream manufacturers) will have to follow, but with their higher cost structures, this will derail the narrative of EV margin parity. There should be a knock-on effect on ICE (internal combustion engine) pricing, too,” investment bank UBS said in a report.

UBS expects the financial subsidiaries of U.S. and German vehicle manufacturers to come under pressure as interest rates rise.

“We expect (manufacturers’) results to sequentially decline from here as price competition intensifies on overproduction. Also finco results will likely remain under pressure. We continue to prefer luxury (stocks) over premium, over mass market manufacturers,” UBS said.

Interest rate increases will affect all manufacturers, according to investment researcher Bernstein.

“Higher financing costs for consumers will generate multiple headwinds. As cars become more expensive to finance, the marginal consumer will opt to keep their current car rather than replace it at the end of the year. This reduces new car demand, negatively impacting volumes for the main auto industrial business but keeping used car prices elevated,” Bernstein said in a report.

“Buyers of new cars will also err towards cheaper or less option-rich cars, posing a net price/mix headwind for the sector,” Bernstein said.

Meanwhile, sales forecasts look superficially healthy.

According to Fitch Solutions, Europe will be the best-performing world region in 2023 with sales of personal cars, particularly Chinese electric ones and commercial vehicles growing 6.2%.

“Several key factors are informing our outlook including an easing in the semiconductor shortage, increased sales for fleet operators and strong demand for electric vehicles. We expect electric vehicle sales to account for nearly 20% of all personal vehicle sales in the region in 2023 as the continued government support and increased uptake of more affordable Chinese EVs fosters EV adoption. We also forecast passenger EV sales in the region to expand by 21.3% in 2023, following a 15.3% expansion in 2022, to reach an annual sales volume of just over 3 million,” Fitch Solutions said in a report.

LMC Automotive has raised its 2023 sales forecast for Western Europe to a gain of 8.2% to 10.97 million, slighty up from a 7.9% prediction a month ago. Western Europe includes all the big markets like Germany, France, Britain, Italy and Spain. LMC points out that although growth rates look strong, sales are rising from a weak base. LMC also agrees some negative economic factors must be considered.

(Sales are still seriously short of pre-Covid’s 14.29 million in 2019.)

“Although these countries are still operating below pre-pandemic standards, a further easing in supply constraints is expected over the course of this year, supporting (sales). Downside risks remain, with countries experiencing recessionary conditions that will be impacting underlying demand. This has been exacerbated recently by jitters in the financial markets. However, order backlogs will continue to provide a cushion to the weakening demand situation,” LMC said in a report.

How will the various carmakers handle this hostile environment?

According to UBS, BMW looks best placed to ride out the storm, while Volkswagen is least favored.

Investment researcher Jefferies says Tesla will continue to generate attention.

“Tesla will remain central to the sector investment theses, even if their shares have become more of a relative investment case, their product and pricing policy create an overhang on pricing across the sector. Elsewhere, we continue to see transformation as a key drive of investment ideas with Renault’s EV IPO, Ford’s EV disclosure split, and VW’s strategic update likely to capture interest through the first half,” Jefferies said in report.