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Europe Auto Makers Fight Off Crises But Inflation, Recession, Energy Shock Undermine Prospects

The European automotive industry, buffeted by coronavirus lockdowns, worries about peace after Russian invaded Ukraine, and a microchip shortage is ready for normality, just in time to see customers slam shut their wallets because of resurgent inflation, the likelihood of a recession and an energy threat.

And there are fears action by Russia to limit or stop gas supplies to Germany this winter might take a big lump out of its economic performance. If Europe’s biggest economy is forced to ration energy or perhaps introduce a shortened work week, that would push the idea of buying a new car to the back of many people’s minds.

Meanwhile global consultants Fitch Solutions said sales of cars and SUVs in Europe will fall 9% in 2022. LMC Automotive reckons sales in Western Europe will slide 6.3% in 2022, although that’s an improvement on the previous month’s forecast of a 7.4% fall. But it looks anemic compared with its forecast at the start of the year that sales would bound ahead by a healthy 8.6%. But the invasion of Ukraine put paid to that.

Western Europe includes all the big markets like Germany, Britain, France, Italy and Spain.

The chip shortage looks to be on the mend. Berenberg Bank of Hamburg, in a recent report, said semiconductor shortages for the automotive industry were likely to ease by the end of 2022, although global consultants AlixPartners said things would be bad until 2024. Bosch, Europe’s largest auto supplier, said it expects global bottlenecks because of a shortage of auto chips to continue into 2023.

Investment bank UBS believes the chip situation has started to improve.

“This (improvement) comes at a time when western auto markets are slowing down, with order intake not supporting strong production growth. While 2nd half production is backed by existing order backlog, we think the perspective for 2023 for a further volume recovery on the back of better semiconductor supply has significantly deteriorated.” UBS said in a report.

The big automakers are about to announce their financial results for the first half of 2022, and UBS said it expects its already announced projections for profit growth in the rest of this year to remain unchanged, although it has already cut its forecast for 2023 and 2024 profits.

“For all (big manufacturers) earnings per share (projections) were cut by up to 30% to factor in lower demand, driven by affordability. European (manufacturers) higher energy cost and risk of gas rationing imply additional downside to 2023 earnings,” UBS said.

“Premium/luxury focussed players and those with a strong EV (electric vehicle) transition story are likely to outperform,” the report said.

Investment researcher Jefferies said it has cut 2023 profit estimates for main manufacturers by 5 to 15% because of higher energy and labor costs, even though raw materials costs have shown signs of easing.

Investment researcher Bernstein expects production to improve during the 2nd half of this year and profit growth estimates remain unchanged.

“However, for the first time since July 2021 delivery times did not increase. This may be the first signal of waning consumer demand in the face of greater economic uncertainty and inflationary pressures. If lead times start contracting in upcoming months, it will likely add to investors’ concerns that there is less pricing power ahead and increase the downside risk to earnings in 2023,” Bernstein said in a report.

LMC Automotive said its slightly improved forecast for 2022 came after June sales were slightly above expectations.

In June, according to the industry association ACEA, European car and SUV sales fell 17% to 1.1 million. Half-year sales were off 14.3% at 5.0 million. Market leader Volkswagen’s sales of its VW own brand and including Audi, Skoda, and SEAT fell 18.5% to 1.1 million. 2nd place Stellantis and brands including Peugeot, Fiat, Citroen, Opel/Vauxhall, Jeep and Alfa Romeo slid 22.5% to 959,000.

LMC Automotive said its forecast for 2022 assumed the industry will not overcome supply constraints anytime soon.

“From next year, we forecast recovery, though recent statistics and the latest news on ongoing supply issues, lead us to remain cautious. Another concern relates to underlying demand, which has weakened in recent months as the economic outlook has deteriorated,” the LMC report said.