European auto manufacturers’ profits will be a bit harder to come by in 2024 but for next year dark clouds are gathering.
Profits should be 15% to 25% lower this year after something of a bonanza in 2023. Financial reports for 2023 will soon shed more detail on expectations for this year. But the threat to sales from China, mainly with electric vehicles, won’t reach top gear before 2025, while next year European Union carbon dioxide emission rules will tighten.
That means 2024 is probably the last year when manufacturers can rely on sales of high-profit margin internal combustion-engine powered vehicles to boost their bottom lines.
Vehicles to be launched in 2024 will include new ICE vehicles like the BMW X2 (and its iX2 EV equivalent), the Toyota Land Cruiser and the Skoda Kodiaq. New EVs on sale will include the Alfa Romeo compact SUV, Cupra Tavascan, Volkswagen ID.7, Renault 5 E-Tech, Kia EV9 and Hyundai Ioniq 5 N hot hatchback.
“We forecast about a 15% earnings decline in 2024. Our 2024 forecast for EU (manufacturers) sees sector EBIT (earnings before interest and tax) decline from €85 billion ($91 billion) to €71 billion ($76.1 billion). In large part this is driven by our expectations of rising discounts in the U.S. and Europe reducing the average selling price of vehicles in 2024. Rising labor costs will still cause cost headwinds despite lower raw material pricing. Limited cost savings might help to offset the earnings decline by a modest degree,” Bernstein Research said in a report.
Bernstein Research said earnings in the current 2021-2025 cycle will peak at 9.3% after 5.2% between 2010 and 2020.
This is despite annual sales in Western Europe being down almost 19% from the January 2019 pre-pandemic peak. GlobalData expects sales in 2024 to rise just under 5% to 12.10 million.
“With supply having been a key limiting factor over recent years, 2024 will see the focus return to the health of underlying demand. In this regard, consumers face headwinds such as high interest rates, inflation, and elevated vehicle pricing,” GlobalData said in a monthly report.
“However, the latter should ease as a function of greater vehicle supply and further volume recovery is baked into the 2024 outlook. Risks remain, with the recent Red Sea attacks hitting freight costs, which only increases pressure on the manufacturing cost base,” GlobalData said.
After the pandemic lockdowns Europe’s automakers were dealt a rare money-making opportunity. Demand was reviving, but supply was inhibited by a lack of chips and semiconductors. This meant the likes of BMW, Audi, Mercedes and Porsche could limit sales of cheaper products and concentrate on selling top-of-the-range models with huge profit margins; result – overall vehicle sales down sharply, overall profits higher. Mass carmakers like Renault and Stellantis brands like Peugeot, Citroen, Fiat, Vauxhall and Opel weren’t able to leverage conditions quite as well as the premium operators, but they still managed to keep profit margins high as supply was constrained.
Investment bank UBS has been predicting for some months that European EBIT will fall between 20% and 25% in 2024 because of growing price discounts and shrinking orders. UBS has said EVs will make small profits or losses and be a big drag on mass market profit margins and even more so in 2025 when the EU’s tighter CO2 regime kicks in.
Electric car sales are plateauing after accelerating to just under 2 million in Europe last. Most forecasters still expect EV sales to return to the fast lane and spurt on to around 9 million by 2030.
HSBC Global Research was slightly more positive for 2024.
“There is limited support from order backlog, and battery electric vehicle pricing is harsh, which could spread to the ICE segment. We are not bullish on the sector, but we do not subscribe to the market’s view of an earnings collapse either, we see demand as flat to slightly up,” HSBC said in a report.
“Importantly, we believe pricing pressure will remain largely limited to BEVs, with ICE pricing staying disciplined. Cost reduction, both materials and manufacturing, could be the key to 2024 earnings resilience,” the report said.
Other pointers to a positive outcome for 2024 came from Germany’s IFO Institute business survey. Germany is Europe’s biggest car market.
“Companies in the German automotive industry are more positive about their current business situation and are much more optimistic about the coming months than they were at the end of 2023,” said Anita Woelfl, from the IFO Center for Industrial Organization and New Technologies.
On the other hand, the IFO cut its forecast for German economic growth in 2024 to 0.7%, down from the 0.9% it had predicted in mid-December.
