European Automakers Are Struggling With Falling Demand

Shares in names like VW, Mercedes and Stellantis were lower this week, heading into Wednesday’s session, after news of “falling demand” in Europe. 

In the first quarter of this year, Europe’s top two car manufacturers faced a downturn due to diminished demand in China and domestic markets, Financial Times reported on Tuesday this week.

Volkswagen Group saw a significant decline in profits, dropping by a fifth from the previous year to €4.6bn, largely attributed to declining resale values and supply issues at Audi, a key brand within the group, the report says. 

Diminished resale values pose a particular challenge for car manufacturers like VW, heavily involved in customer financing. When used car prices fall below expectations, companies are compelled to take write-downs on these loans.

FT also noted that Stellantis, the parent company of Peugeot and Jeep, experienced a larger-than-anticipated drop in revenue, totaling €41.7bn in the first quarter, primarily due to weaker performance in its core European markets.

Similarly, Mercedes-Benz reported a nearly 30 percent decrease in earnings before interest and tax, down to €3.9bn, as both sales volumes and profit margins experienced declines.

The luxury automaker also said sales of new cars were down by 8%, led by a slowdown in Asia. This prompted Citi to come out this week and comment that they are “increasingly . . . worried about the [Mercedes] Cars operations,” the report notes. 

Meanwhile, Jefferies said it was a “downbeat start” to the year for VW.

As we have been pointing out on Zero Hedge, the automotive industry, previously buoyed by supply chain disruptions driving up prices, is now grappling with challenges stemming from plummeting resale values of electric vehicles. The EV industry, especially in China, is winning by going smaller, we noted last week. 

Factors contributing to this include weaker demand, software obsolescence, and price competition fueled by Tesla and Chinese manufacturers. Additionally, higher interest rates have deterred consumers.

Volkswagen and Mercedes-Benz face heightened exposure to issues in China, their largest market, where consumer demand has softened amid intensifying competition from local players. VW reported a lower-than-expected operating margin due to discounts across its models and internal supply chain issues affecting Audi V6 and V8 engine production.

Despite challenges, VW remains focused on transitioning its portfolio with the launch of 30 new models, predominantly electric vehicles, it says. Stellantis also encountered a turbulent quarter as it prepares to introduce new models, particularly electric cars, later in the year. Net revenues for the first quarter were €41.7bn, down 12 percent year-on-year, primarily due to inventory depletion from the previous year.