Autos’ car crash ups the likelihood of EU airbags
The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Updates to add graphic.
By Neil Unmack
LONDON, Sept 30 (Reuters Breakingviews) -To paraphrase Tolstoy, every unhappy carmaker is unhappy in its own way. Volkswagen VOWG_p.DE and Stellantis STLAM.MI have slashed their guidance for this year. The 50 billion euro German group is grappling with competition in its low-margin mass market business, while the 37 billion euro maker of Jeep and Chrysler is struggling in North America. Yet their difficulties may help European policymakers shift gear on electric vehicles.
Of the two profit warnings, the one announced by Stellantis on Monday was arguably the more shocking, evidenced by its near 15% share price collapse. The group run by Carlos Tavares, famed for its cost-cutting skills and relatively high profitability versus European peers, said operating margin this year would be between 5.5% and 7%, down from guidance of 10% or more. Most of the problem relates to North America, where a large backlog of unsold cars is hammering prices. Wolfsburg-based Volkswagen, by contrast, is facing shrinking deliveries and revenues in its core business, which already had a first-half operating margin of only 2.3%.
Both events come at a pivotal moment for European policy. Member states will this week decide whether to slap Chinese automakers with tariffs. And next year, they will clobber auto groups who fail to cut emissions by up to 15% versus 2021 with fines, estimated at as much as 15 billion euros. Carmakers are in a poor position to shoulder further knocks: Volkswagen’s latest forecast for 9 million deliveries this year is still over 10% below the level the group achieved before the pandemic.
Stellantis’ warnings on Chinese competition, in addition to its North American challenges, will reinforce the case for tariffs, which countries including Spain and Germany have been opposing. The trickier question is whether the current malaise comes in time for Brussels to water down the CO2 fines, which would need approval from the Council, Parliament and Commission. The case for at least a partial delay is now strong.
Carmakers’ first pit stop will be self-help. Berenberg analysts estimate Volkswagen may need to close two plants at a cost of perhaps 4 billion euros to restore profitability in its volume business. Stellantis, meanwhile, will bring forward plans to clear out the backlog of unsold cars, which may further hurt prices that have fallen by 5% already this year, HSBC reckons.
On the bright side, falling interest rates may help customer purchases. And carmakers are starting to roll out cheaper electric vehicles. Still, Chinese groups like BYD 002594.SZ will sustain their onslaught of global markets. Stellantis and Volkswagen now trade at just 2.7 and 3.3 times trailing earnings, according to LSEG data, both down by 30% or more from their peak this year. In valuation terms, that’s a cry for help.
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CONTEXT NEWS
Stellantis on Sept. 30 said that 2024 operating margin and free cash flow would be sharply below its previous guidance, sending its shares down as much as 13%. The announcement came after Volkswagen on Sept. 27 delivered a similar profit warning.
Stellantis, maker of Jeep and Ram vehicles, cited problems in its North American business as well as increasing competition from China, and said its operating margin this year would be between 5.5% and 7%, down from the “double-digit” levels it had previously guided.
Volkswagen on Sept. 27 said that deliveries and revenue this year would be below 2023 levels, having previously guided to higher levels. The Wolfsburg-based group now expects an operating margin of 5.6%, down from 6.5% to 7%.
Stellantis shares were down around 13% as of 0954 GMT, while Volkswagen shares fell by just over 2%.
Graphic: Europe’s auto giants’ shrinking valuations https://reut.rs/4eDTTuQ
Editing by George Hay and Oliver Taslic
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