O le a alualu i luma le faatau atu o taavale a Europa i le 2023, ae o tupe mama e ono solo

Europe’s automakers pleased investors with strong profit reports for 2022 but they will be raising eyebrows as some experts see deteriorating earnings prospects for this year.

The consensus view is that sales in Western Europe will increase strongly this year to almost 11 million compared with last year, but that still leaves the market seriously short of pre-Covid’s 14.29 million in 2019. The consensus starts to falter though when profitability comes under the microscope.

Fitch Ratings points to many big manufacturers like Stellantis, Mercedes and BMW, flush with cash, launching big share buy-back programs, while Renault reinstated a dividend after a 3-year gap. Fitch expects overall profits to remain strong, boosted by pent-up demand and falling raw material prices.

“We expect profitability to remain solid, supported by the transition to battery electric vehicles, pent-up demand and lower available volumes due to ongoing supply chain issues that increase pricing power for manufacturers. Although we expect pricing conditions to become more challenging in 2023, especially in Europe, we believe easing raw material prices and improving inventory management should mitigate the still high inflationary environment and weaker consumer sentiment,” Fitch Group said in a statement.

That’s news to investment bank UBS, which sees an oversupplied market leading to pricing weakness with earnings per share dropping by 40% this year. Tesla has triggered an electric vehicle price war, which is spreading across the so-called “legacy” auto manufacturers, UBS said.

“(manufacturers) will likely see difficulties in maintaining price discipline and high mix, while additionally expecting only flat to slightly up volumes year on year with EBIT (earnings before interest and tax) to moderately suffer from lower financial subsidiary earnings and higher cost. We’re cautious on all mass (manufacturers) for 2023, while preferring more cycle-resistant luxury names and Tesla thanks to cost and tech leadership,” UBS said in a report.

Germany’s IFO Institute is picking up negative vibes too in its March report.

“(Automotive) Manufacturers in particular assess their current situation as drastically worse than in the previous month. This presumably has to do with the fact that buyers are being very cautious at the moment,” said IFO director Professor Oliver Falck.

LMC Automotive’s regular monthly sales report raises its Western Europe forecast a bit for 2023 to a gain of 7.9% to 10.96 million sedans and SUVs, up from its previous month’s forecast of plus 7.8%. But it concedes that the market carries some worrying features.

“We still see supply constraints dominating this year. Underlying demand faces challenges too, with many West European countries currently facing recessionary conditions and weak growth thereafter. In recent months though, consumer sentiment has become a little less pessimistic, and with a backlog of orders, we still view that a faster recovery in production this year would be supported by demand. However, it remains clear that rising costs of living and elevated levels of inflation seen across the region pose a downside risk to our forecasts,” the report said.

Meanwhile, turning to the profit side, LMC analyst Peter Kelly points to some ominous developments.

In a report entitled “A change in automotive fortunes is coming”, Kelly says the surge in new vehicle prices in the U.S. and Europe and overall manufacturer profitability is coming to an end.

“At some point, possibly later this year, though unlikely sooner than that, rising supply should meet falling demand,” Kelly said.

Kelly doubts manufacturers who say they will never return to the bad old ways of sacrificing profits for volume.

“We are not convinced by this logic and expect market competition to become a major factor once the supply-demand imbalance dissipates. It will take a brave (manufacturer) to stand by and preside over significant market share loss to an aggressive competitor willing to deliver more quickly and/or at better prices. It will only take one or two large (manufacturers) to change any market – and the notion that the industry could discipline itself without collusion, which would attract serious regulatory attention, can largely be dismissed,” Kelly said.