A feature of the modern era is the way that things which are predictable are so often presented as a surprise. Today will see several of our themes in play. One of them has been the way that China has been looking to export its way out of its property crisis slow down. That as we have noted involves a further emphasis on vehicle exports and in particular electric vehicles or EVs. Another has been the deindistrialisation of Europe being driven by high energy prices of which we saw more evidence only yesterday.
The euro area’s manufacturing sector slid deeper into contraction at the end of the third quarter, latest HCOB PMI® survey data showed, as key barometers of factory strength such as production, new orders, employment and procurement activity all declined at quicker rates. Eurozone goods producers also downwardly adjusted their inventories as business growth expectations slumped to a ten-month low.
The present situation looks awful as we note that the latest decline comes on the back of all the previous ones.
HCOB Eurozone Manufacturing PMI Output Index at 44.9 (Aug: 45.8). 9-month low.
New orders and output decrease at fastest rates since December 2023.
But for my purpose today this is the main issue.
Notably, the survey’s headline index fell to its lowest
level in the year-to-date and was below the average seen across the current 27-month downturn.
There is the confession that we are in a phase of deindustrialisation although they avoid putting it like that and we can look at it another way.
The worsening industrial slump in Germany, for example, is too big for Spain’s momentum in September to make much of a difference.
The geographical split points rather directly at the car industry does it not? For the moment the overall outlook is grim.
According to our nowcast model, eurozone industrial production will likely drop by around 1% in the third quarter compared to the last one. With incoming orders plummeting fast, we can expect another dip in production by year-end.
So as Madonna put it the problems are getting deeper and deeper.
The Financial Times
Yet we are told here that the hard times in 2024 for car manufacturers are apparently a surprise.
At the start of 2024, the sector had expected a return to normal after Covid-19 supply chain disruptions were resolved, with vehicle production forecast to rise more than 2 per cent on the back of pent-up demand.
I am not sure I would place much faith in this chap.
“We’ve all assumed that things would normalise but they are taking a turn for the worse. All of a sudden there is an acceleration in negative factors and the magnitude of the deterioration is big,” said Jefferies analyst Philippe Houchois.
Suddenly they have cottoned onto our China theme.
The biggest headwind has come from China, the world’s largest car market, which has been hit by the property sector slowdown. Although Beijing has unleashed a swath of stimulus measures to bolster the economy, the likes of Volkswagen and Mercedes-Benz are likely to struggle as customers choose local brands with superior technology and low pricing.
Actually only part of our theme because this is only competition within China whereas we know it plans plenty of exports as well.But they have been hit hard.
Foreign brands’ market share of Chinese auto sales is at a record low of 37 per cent in the first seven months of 2024, down from 64 per cent in 2020, according to data from Automobility, a Shanghai consultancy.
The decline has been particularly steep for German carmakers, who now have less than a 15 per cent share compared with nearly 25 per cent four years ago, Chinese industry data shows.
Also the claim is that they are selling the wrong type of vehicles.
Western carmakers, which had enjoyed economies of scale from selling large volumes of petrol cars in China, will see those benefits declining as they lose their market share to local rivals offering state of the art EVs, according to Matthias Schmidt, an independent car analyst.
But this piece seems either unaware of or ignores the fact that China plans an export drive.
International carmakers would have to compensate for the squeezed margins by raising prices in other markets. “There are a lot of negative consequences [in the Chinese market] that are not staying within China’s borders,” he said.
If you raise your prices then Chinese car manufacturers will step in and undercut you so that your position gets further weakened.
EVs
These were supposed to be a triumph.But now we are told this.
“From a pricing perspective, 2025 could be a very difficult year in Europe,” said Daniel Schwarz, an automotive analyst at Stifel. “They have to sell more electric cars. People don’t want them. They have to provide more discounts for these cars.”
Rather curiously we see that interest-rates get the blame when the way things are going we can expect them to be lower next year.
In Europe, where higher interest rates have capped sales growth, car companies also are struggling with slowing growth in EV sales.
I was wondering how long I could go without mentioning the elephant in the room which they have ignored which is energy prices. Let me bring in one component of it which is that the running costs ( electricity versus petrol or diesel ) used to be quite a bit cheaper for EVs and that has changed.
Also we now rather trip over what is a clear European Union issue. We have seen quite a bit of talk from its leaders about the need to improve its economic performance and indeed ECB Vice President de Guindos has spoken about it today.
Greater integration in goods, services, capital and labour markets is crucial for the EU’s success, says Vice-President Luis de Guindos. To boost European productivity and competitiveness and ensure sustainable growth, the EU must take determined action.
Yet if we return to the real world we see that they are in fact hindering their economy.
The outlook is unlikely to improve next year with new EU carbon emissions standards forcing European carmakers to sell more EVs rather than petrol cars despite sluggish demand. ( FT)
The left hand does not seem to know what the right hand is doing.
As to prices a reply from BobwithJob tells a tale.
People are simply not willing/able to shell out 45000 Euros for a Tiguan when you can have a 4×4 Hyundai Tucson with almost all driver assists you can imagine in the base trim for below 40k.
Comment
It takes a special skill in my opinion to have a long article on the issues for European car production and look away from the major issue of energy costs. China has allied itself to Russia to get cheaper energy whereas in Europe we see this.
“Europe is not cost-competitive in many areas, in particular, when it comes to the costs of electricity and gas,” Thomas Schäfer, who runs the Volkswagen brand, said in a post on social media slamming Europe’s industrial policy.
That was from Politico in November 2022. He then went further.
“The fact of the matter is, in an international comparison, Germany and the EU are rapidly losing their attractiveness and competitiveness,” Schäfer said. “The U.S., Canada, China, Southeast Asia and regions such as North Africa are stepping on the gas.”
Although they do not say it I wonder if this is also a factor here.
UK luxury-car maker Aston Martin and Ineos Automotive, a new car brand launched by billionaire tycoon Jim Ratcliffe, have blamed component shortages for delays with production, ( FT)
Are component manufacturers finding it impossible to compete because of high energy prices and giving up. As an aside with what is going on at Manchester United Jim Ratcliffe has a host of problems right now.
Returning to the overall theme we see an industry in crisis with much of the issue being European Union policy on energy. It is hard to see any change here short of an end to the Russo-Ukraine war. It is hard to see the Mario Draghi plan helping much as its green energy proposals are likely to make things even worse.