Car Makers back on the Road

UK investors would have been disappointed had they invested in European carmakers in recent years. This sector has been a massive laggard in a region that was already struggling.

For context, industry stocks were dragged lower due to four main reasons:
Structural threat of “CASE” (connected, autonomous, shared, electrified) mobility. The car industry is going through significant structural change. The rise of companies like Tesla and Uber reflect a new world of transportation, which will no longer be determined solely by self-driving vehicles and the internal combustion engine.

Because of the fast pace of change, the big carmakers are being forced to adapt. Major investment in the transition to electric vehicles (EVs) began to accelerate following the diesel emissions scandal in Europe. This episode was when software which manipulated air pollution tests was discovered in vehicles from some of the big European carmakers. This ultimately led to a US federal judge ordering Volkswagen to pay a $2.8bn criminal fine and automakers to rethink their business models.

As carmakers look to the future and away from diesel, they have been forced into making huge investment in new technologies. This has hurt their balance sheets and profit margins. Volkswagen alone expects to spend $50bn in the transition; Daimler forecasts that it will spend $20bn.

Projected annual global electric vehicle sales


Macroeconomic weakness.Long before the coronavirus wreaked havoc on economies, global auto demand had experienced its longest downturn since the global financial crisis. Then COVID-19 made things worse. European Union sales plummeting by 76% in April. Sales in Italy and Spain fell closer to 90%.

China has been the key growth market for the sector in recent years, but that country’s slowdown had a huge impact on European names with significant sales exposure, such as Volkswagen, Daimler and BMW.

Politics. The political landscape over the last few years has also been a challenge.

The US-China trade war hurt those European names with manufacturing hubs in the US, notably BMW and Daimler. Separately, Brexit provided an additional concern. Germany exports 40% more cars to the UK than to the US, so a “no deal” Brexit posed a significant risk.

Regulations. Carmakers also faced new European CO2 and WLTP (world harmonised light-duty vehicles test procedure) emissions testing certifications in 2019.

Both standards resulted in added costs and forced the automakers to cut production in order to ensure compliance.
So, what has changed?
  Challenges still exist for the industry, but there are some reasons for optimism:

European Union “Green Deal”. The EU is circulating a plan to inject EUR100bn into the sector as part of a goal to promote “clean” modes of transportation. This will see greater financial support for automakers in their transition to battery electric vehicles (BEVs), and in meeting emissions targets.

The German government has also directed all the fuel stations across the country to install electric car charging points to address the refuelling concerns of users and in turn to boost the demand of these vehicles as part of its economic recovery plan.

Mergers/Acquisitions. Big deals are notoriously difficult to complete in the sector, partly due to political obstacles to cross-border deals. However, Fiat-Chrysler and PSA, the owner of Peugeot, agreed back in December to merge to create the world’s fourth-largest carmaker by volume and third largest by revenue. This deal should help eliminate excess production capacity.

Increased cooperation. Rising collaboration between firms has seen automakers share technologies and resources, reducing pressure on balance sheets and cash flow.

In the last year, BMW and Daimler announced a EUR1bn partnership to develop a suite of “mobility services”, while Ford and Volkswagen announced an electric and autonomous vehicles collaboration.

Actual and estimated electric car models coming to market in Europe

Positioned for the future
  The recent past has been challenging for European carmakers. Demand has slumped and they have been forced to invest heavily simply to stay relevant in the future.

But UK investors would do well to look beyond the near-term pressures and consider how well the automakers are preparing themselves for a different environment. In that context, they could offer interesting longer-term Investment opportunities.
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