The European auto industry is under attack from all sides, but major forecasters, a few days ahead of the annual Geneva Auto Show, are still clinging to the hope that maybe a period of stagnation is on the cards for 2019.
Geneva is the first big car show of the year in Europe. The 2nd major one, held in the fall, alternates between Paris and Frankfurt. Like all big auto shows now, Geneva is being hit by no-shows, as manufacturers baulk at the huge costs of participating. Ford, Jaguar Land Rover, Hyundai, Volvo, PSA’s Opel, Infiniti, Mini and Tesla won’t be in Geneva.
The German economy, Europe’s biggest, is on the verge of recession. Britain’s Brexit problems are heading for a crisis which some believe will cause a major and expensive disruption for Europe’s major auto manufacturers. There is fear a trade war between the European Union might still break out and hobble Germany’s finest like BMW, Audi, Mercedes and Porsche, not to mention already struggling Britain-based Jaguar Land Rover.
There’s the problem with diesels, which were meant to tide over European manufacturers as people switched to electric cars. Last year this caused major disruption when carmakers failed to meet tighter EU rules on fuel consumption which kicked in on September 1. Diesels were meant to fill this gap, but health worries concerning poisonous emissions have put a big dent in sales and left manufacturers scrambling to improve gasoline engine efficiency.
Then there is the huge expense of actually producing electric cars, which are currently still too expensive and impractical to produce sales without a hefty prod from government subsidies. Autonomous cars for the masses now seem to more of science fiction dream, but manufactures are squandering huge amounts of capital to pursue this with no obvious payback date.
Despite all this, forecasters see stagnation rather than disaster for 2019.
LMC Automotive expects barely perceptible 2019 growth of 0.6% in Western Europe, but only if there is a quick EU-UK Brexit agreement. Western Europe includes all the big markets like Germany, France, Britain, Spain and Italy. Investment researcher Evercore ISI sees sales falling 1% in the EU. The European Car Manufacturers Association expects an increase of under 1% in the EU, with sales holding close to 2018’s 15 million.
Professor Ferdinand Dudenhoeffer from the Center for Automotive Research (CAR) at the University of Duisberg-Essen in Germany said the outlook is poor for the industry, but not as bad as 2009, when the financial crisis rolled through the world economy.
Dudenhoeffer said the industry fears the impact of Brexit, and tightening rules on CO2 emissions.
“The profits of carmakers and suppliers will be very thin in 2019. Profit warnings, production cuts and downsizing are inevitable. The biggest burden is likely to be the decline (in sales) in China. Not a good environment for Geneva promising splendor and glamor,” Dudenhoeffer said.
German carmakers have made fat profits from sales in China.
Peter Wells, Professor of Business and Sustainability at Cardiff Business School, said the European industry is at a tipping point.
“Underlying this precarious state is a long-term problem: the industry remains unable to adjust to large-scale and rapid changes to market conditions because design and production lead times are too long, and the reliance on manufacturing economies of scale demands high levels of capacity utilization,” Wells said.
“As a result, the industry is vulnerable to changes in the trading frameworks such as the UK leaving the EU; and the US potentially imposing higher tariffs on imported EU cars. The lack of flexibility has also been exposed by changes in the EU type approval (CO2) testing regime, and by the decline in demand for diesel,” Wells said.
Professor Stefan Bratzel of the Center of Automotive Management (CAM) in Bergisch Gladbach, Germany said Brexit, possible trade conflicts, and the need to move to electric cars will trouble the industry.
“Europe is worried most by Brexit and what will happen – hard, soft or a new election for a British government – we don’t know. Brexit is the biggest threat for this year. And of course a trade conflict between the U.S. and EU,” Bratzel said.
“Electromobility of course, autonomous driving and mobility platforms are longer term challenges,” Bratzel said.
Felipe Munoz, global automotive analyst at JATO Dynamics said events in Germany and Britain are looking ominous.
“Europe is currently in a very complicated situation. Two big economies, Germany and the UK, are facing uncertain times. Whatever happens after Brexit it won’t be the “(Manufacturers) look better prepared for a recession this time around. Which is important, as at some point we will get one. same with a lot companies saying they will quit Britain. Germany, after years of strong growth, is slowing down,” Munoz said.
But Bernstein Research analyst Max Warburton said carmakers are in much better shape to handle a downturn than in 2009.
“(Manufacturers) look better prepared for a recession this time around. Which is important, as at some point we will get one. In fact, with Chinese car sales slumping, many (carmakers)) are already beginning to wonder if the downturn has started. If demand falls more widely, what will it mean for the Europeans?” Warburton said.
“Let’s not be naïve – revenue declines will still hurt badly. But margins for most are higher than 10 years ago, which means more of a buffer before they fall into loss. Balance sheets are stronger, with piles of cash. Flexibility is arguably better. And management teams are already taking proactive actions on cost,” Warburton said.
CAR’s Dudenhoeffer sees hard times ahead, with some relief perhaps after a couple of years.
“Difficult economic surroundings and high investments in electromobility are the facts of Geneva, next to the glamor. This will be a year of profit-warnings rather than big profits. This will hardly be better in 2020. The hope is for the period after 2020,” Dudenhoeffer said.
Highlights of the Geneva show will include the Honda Urban electric car, now close to showroom-ready, the new Peugeot 208 citycar complete with electric version, the Mazda CX-4 compact SUV in couple style, Alfa Romeo Giulietta, electric BMW 3-series and the new Ferrari F8 Tributo.
The Geneva Auto Show opens to the public March 7 through 17 at the Palexpo center.