President-elect Donald Trump’s U.S. tariff threat has added to the woes of investors in the European auto industry, which include possible strikes, factory closures, a weak economy, Chinese competition and the self-inflicted CO2 problem.
Volkswagen faces a strike as it seeks to shut factories in Germany to keep costs under control. Other leading manufacturers in Europe face the same pressures. Profits are being squeezed as the European economy sputters and sales stagnate, particularly in the most important market, Germany.
Then there is the electric vehicle conundrum. This has a couple of controversal aspects. Can the harsh program of the European Union’s CO2 emission cuts between now and zero levels in 2035 be met while at the same time maintaining an acceptable level of profitability? That looks difficult enough but how will the industry face down Chinese EV imports with their claimed 30% efficiency advantage?
Some politicians and unions see the EU’s CO2 emissions program as an existential threat to a flagship auto industry employing millions in highly-paid jobs. It might be pushed over the edge by the relentless push towards electrification. Expect imminent moves to thwart this self-harm.
The new unknown is U.S. tariffs
And now there is a new unknown – U.S. tariffs. President-elect Trump has been musing aloud about some of his plans and the word “tariff” causes consternation among European investors who see rich markets in the U.S. coming under threat. This echoes a similar dilemma during Trump’s first presidency. That was based on the fact U.S. auto imports to Europe are charged at 10%, while going the other way the charge is only 2.5%. That came to nothing but correcting that imbalance wouldn’t cause much irritation.
But ahead of Trump’s 2nd term tariffs have taken on a much bigger threat. Will Trump decide to build a tariff wall around America and charge Europeans say 20 or 25%, the level currently levied on truck imports? Will there be a 25 to 100% tariff barrier against Mexico? According to investment researcher Bernstein, Volkswagen imports 40% of its U.S. sales from Mexico, and Stellantis 21%.
Berenberg Bank points out that BMW, at 66%, has the highest share of U.S. sales that are produced locally, followed by Mercedes at 32% with about 57% imported from the EU and 11% from Mexico. VW overall is at 23% U.S. production, but that includes 40% of own brand sales. Audis, Porsches, Bentleys and Lamborghinis are 100% imported.
Investors might be reassured by the thought that any U.S. tariff wall is unlikely to happen if it jeopardizes huge profits made by likes of Google, Apple, Microsoft and Amazon.
4 million annual sales missing
Sales in Western Europe in 2024 are likely to fall just over 1% to 11.43 million sedans and SUVs, according to GlobalData. That might not sound like much of a disaster, but since Covid struck four years ago, the overall market has lost about 4 million annual sales. That is why so many of the mass market manufacturers find profitability hard. Their factories are tuned to a much larger output and that has undermined the economics for everybody, except of course the Chinese.
For 2025, GlobalData expects a 2.4% increase in Western Europe’s sales.
“Ongoing economic and political challenges in the region are hindering consumer confidence, and new vehicle sales continue to struggle. While monetary policy easing and new model activity are expected to provide some relief in the market in 2025, the prevailing headwinds are likely to continue to act as a drag on vehicle sales,” GlobalData said in a report.
Investment bank UBS expects sales in all of Europe to rise 2.0% to 13.7 million. Western Europe includes all the big markets like Germany, France, Britain, Italy and Spain.
“Earnings momentum in the sector is likely to remain negative in the coming quarters. With share prices down about 20% over the last 3 months investor positioning is clearly on the cautious side, and we think it is too early to turn more constructive,” UBS said in a report.
Not everybody has a negative stance. Investment bank Morgan Stanley sees some possibilities for good cheer, at least for investors.
“We move our industry view from Cautious to In-Line and take a fresh look at the (manufacturers’) margin cycle. Pressure from Chinese (manufacturers) is still increasing, but the sector’s underperformance sets the valuation bar lower, and (stocks) affordability is improving,” Morgan Stanley said in a report.
Morgan Stanley upgrades BMW to “overweight” and likes Mercedes.
UBS said 2025 has the potential to be a year of record uncertainty for Autos, especially in Europe. The EU CO2 rules are being questioned, there are Trump’s tariff risks, the possible VW strike on December 9, and increasing news of big restructuring plans by manufacturers.