Investors were happy with the robust profit forecasts that European automakers provided for 2022; nevertheless, these estimates will likely raise questions because some industry analysts anticipate a decline in earnings for this year.
Although sales in Western Europe are expected to rise sharply this year to about 11 million from 10 million in 2018, that figure is still far short of the 14.29 million sales expected before the introduction of the Covid data standard in 2019. But, when profitability is analyzed, widespread agreement begins to break down.
According to Fitch Ratings, a number of large manufacturers, such as Stellantis, Mercedes, and BMW, are flush with cash and have begun large share buy-back programs. On the other hand, Renault has resumed paying dividends after a hiatus of three years.
As a result of pent-up demand and declining prices for raw materials, Fitch anticipates that total profitability will continue to be robust.
We anticipate that the company’s profitability will stay strong, as it will be supported by the shift pent-up demand for battery-powered electric cars, and reduced available volumes as a result of ongoing supply chain concerns that raise pricing power for manufacturers.
The Fitch Group stated in a statement that even though they anticipate pricing conditions to become more difficult in 2023, particularly in Europe, they believe that falling raw material prices and improved inventory management should help reduce the impact of the persistently high inflation rate and the deteriorating consumer morale.
This information comes as a surprise to The UBS investment bank, which forecasts that an oversupplied market will result in pricing weakness and a 40% decrease in earnings per share for this year.
According to UBS, Tesla is the cause of an ongoing pricing war in the electric vehicle market, which has grown to include the so-called “legacy” automakers.
In addition to expecting just flat to slightly increased volumes year on year, manufacturers should anticipate that their EBIT (profits before interest and taxes) will moderately suffer as a result of greater cost and reduced subsidiary earnings of financial.
According to a report by UBS, the company recommends exercising caution with regard to all mass (manufacturers) for the year 2023, while expressing a preference for more cycle-resistant premium brand names and Tesla because of its pricing and technological leadership.
According to its study for the month of March, the IFO Institute in Germany is also picking up on bad sentiments.
“Automotive Manufacturers in particular evaluate their current condition as being significantly more precarious than it was one month ago. According to the director of the IFO, Professor Oliver Falck, this likely has something to do with the fact that customers are currently exercising a great deal of caution.
The usual monthly sales report that LMC Automotive publishes boosts its projection for Western Europe a little bit for 2023 to a growth of 7.9 percent to 10.96 million SUVs and sedans.
This is an increase from its forecast for the previous month, which was a gain of 7.8%. Nonetheless, it does acknowledge that the market has certain concerning characteristics.
“We continue to anticipate that supply issues will be the primary focus this year. The underlying demand sector is also encountering difficulties, as a number of nations in Western Europe are currently experiencing recessionary conditions and subsequent sluggish growth.
Yet, in the most recent few months, consumer attitude has grown a little less negative, and with an order backlog, we continue to believe that a quicker recovery in output this year will be supported by requirements.
According to the research, “yet, it is still abundantly obvious that rising expenses of living and elevated levels of inflation witnessed across the area offer a downside risk to our estimates.”
In the meantime, shifting to the profitability side of things, Peter Kelly, LMC analyst refers to some concerning events.
Kelly claims in a research titled ” A shift in the car industry’s luck is on the horizon” that the current upward trend in new car prices in the United States and Europe, as well as the overall profitability of manufacturers, will soon come to an end.
According to Kelly, “at some time, conceivably in the latter part of this year, though it is unlikely that this would happen any sooner than that, increasing supply should meet dropping demand.”
Kelly is skeptical of manufacturers who claim they will never go back to the inefficient old practices in which they prioritized volume over profits.
We are not persuaded by this line of reasoning, and we anticipate that the level of market competition will become a significant issue after the supply-demand imbalance is resolved.
It will take a courageous (maker) to stand by and watch as they lose a major portion of their market share to a more aggressive competitor that is willing to deliver their products more swiftly and/or at better pricing.
According to Kelly, “it will only take one or two significant (manufacturers) to disrupt any market, and the assumption that the industry could enforce its own standards without resorting to collaboration, which would garner major attention from regulatory authorities, should largely be discarded as a fallacy.”
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