Are European automakers headed for a death spiral?

I don't intend to exaggerate, but I am getting the sense that the auto industry in Europe (Germany especially) is on its death bed.

Falling Euro EV Sales / Shrinking EV Share

Bloomberg:

EV deliveries in the region’s biggest car market [(Germany)] fell 69% during August, fueling a 36% drop across the region, the European Automobile Manufacturers’ Association said Thursday. […] With the battery-car market share shrinking to 14% in August — down from just over 15% last year

Figure of the above statistics. Germany cutting subsidies was a big blow to the industry. New car registrations also dropping. From same Bloomberg article:

Across Europe, new-car registrations dropped 16.5% compared to a year ago to 755,717 million units last month with declines also in France and Italy. The UK was the only major market where EV sales rose, gaining 10.8%.

European plants are underutilized because they make more than they need. From DW:

One in three European factories of carmaking behemoths like BMW, Mercedes, Stellantis, Renault and Volkswagen is underutilized. In some of their plants, less than half of the vehicles that could theoretically be produced are actually being made.

Examples of hard-hit companies

VW is planning to layoff 15K, possibly closing 2-3 plants in Germany (for the first time). Ending job security program that prevents layoffs through 2029. VW union workers are not happy and are threatening strikes. BMW cutting guidance for operating margins by 200 basis points (to 6-7%). An Audi plant in Brussels facing closure. Stellantis plant in Italy facing 60% fall in production in 2024.

The Threat of Chinese Exports to US/Europe

Meanwhile, China is the new auto giant. This graph of exports by country is from early 2024–China is the Japan of the 1980s. The threat of Chinese competition is so high that EU is considering 50% tariffs (currently 15% on Chinese EVs), while the US is at 100%. In past years, I've always heard that Chinese cars are junk. Junk cars wouldn't need to need to have their price doubled to keep consumers from buying them. In other countries, Chinese brands are taking over the nascent EV market: “Chinese automakers accounted for 88% of the EV market in Brazil and 70% in Thailand in the first quarter of this year.”

In Europe, despite tariffs: “Chinese carmakers' share of passenger car sales in Europe rose to 17% in the first seven months of 2024 from 12% a year earlier, according to data from automotive consultancy Inovev, and Chinese car exports have reached record highs this year.” (Reuters).

Shifts in China's Domestic Markets

The Chinese automobile renaissance is killing foreign producers in China, yet another sign that these cars in China are actually comparable quality.

Foreign brands’ market share of Chinese auto sales is tracking at a record low of 37 per cent in the first seven months of 2024, down from 64 per cent in 2020, according to data from Automobility, a Shanghai consultancy. So far this year, US brands are down more than 23 per cent while Japanese, Korean and German carmakers have also suffered double-digit declines, the data showed. By contrast, sales of Chinese brands are up nearly 22 per cent with Chinese companies overwhelmingly dominating sales of the EV market.

Here's Ford CEO/CFO being shocked by the quality of Chinese EVs in a test drive. Longer article here.

Technological Edge in EVs for China?

Nearly 40% of Chinese auto sales are of EVs versus 10% for the US and 21% for Europe. Aren't the US/EU supposed to be championing the green revolution in autos? BYD had a 5% share of Chinese cars in 2022–today it's 20%. That's a big threat to Tesla for instance, who gets 20% of its revenue from China.

Possible Bull Case

So is there a bull case for VW? Here is a Sum of the Parts bull case for Volkswagen. VW owns stakes in Porche, Traton in addition to owning Audi, VW cars, Skoda, Seat, Cupra Lamborghini, Bentley and Ducati. I don't fully understand how the debt impacts the analysis here, though. OP claims the debt is held by a captive finance arm and fully secured by leased cars + non-recourse (only collateral can be pursued, nothing more).

Closing Thoughts

How are European automakers going to handle the competitive threat of a new Chinese auto juggernaut along with massive fiscal support in the US (from the IRA)? Their energy prices face much higher spikes than in the US and China. Labor unions are much more powerful in Europe, making cost cuts difficult. Autos are already a very difficult sector to invest in, but I suspect European cars brands may be uninvestible and they are rightfully cheap on a P/E basis (if earnings are even positive).

Articles used in this post: