Michael Dean, senior industry analyst (autos) at Bloomberg Intelligence, shares his thoughts on the future of the European automotive sector in 2023.

Michael Dean, senior industry analyst (autos) at Bloomberg Intelligence

Escalating battery costs and battery supply could be the industry’s next bottleneck. This means that there is only a two-horse race for battery electric vehicle (BEV) supremacy, with Volkswagen the sole contender for Tesla’s crown.

Tesla’s new EU capacity and robust global demand should enable it to retain its BEV sales crown for at least another two years, though Volkswagen is hot on its heels and could overtake in 2025/26, assuming software delays are resolved.

VW already enjoys a leading 21% BEV market share in Europe, but this dominance needs to be replicated in other regions, particularly China, where its BEV share in year-to-September was only 4% vs. 15% for the overall market. China’s BYD is set to become the third-largest BEV player in 2022 and may exceed one million units annually in 2024.

Battery prices are key to BEV-cost competitiveness

As the battle for BEV leadership intensifies in 2023, battery prices remain critical to cost competitiveness, with all automakers chasing the same commodities at the same time. Adding battery capacity raises the stakes further, suggesting battery supply may be the next bottleneck. VW is investing as much as €30bn in the supply chain, including six new battery-cell plants in Europe by 2030. The company is also extensively hedged on commodities.

Audi’s CFO has highlighted the company’s progress, with its midsize Q4 BEV SUV’s margin now similar to its internal combustion engine (ICE) counterpart, the Q3. The brand benefits from VW’s economies of scale and high-volume MEB platform, unlike peers, where BEVs remain largely margin-dilutive.

Can Ferrari, Porsche luxury prove winners in 2023 vs. tech?

Luxury automakers may prove a safe haven in 2023, given Ferrari, Porsche and Lamborghini’s strong order books, with accelerating BEV sales a differentiating factor for the German brand. Porsche’s share price has outperformed peers since its late-September IPO, which may encourage a Lamborghini IPO by VW.

Tech-related stocks lost their shine in 2022, with Tesla’s shares halving on doubts about lofty growth expectations and autonomous driving, as it faces its first real competition in 2023 with a wave of competitive BEV launches from VW, Audi, Porsche, BMW and Mercedes, all seeking their own tech recognition.

Europe, US Sales set to bounce off lows; China risk, reward

Automaker supply constraints are easing just as consumers are curbing spending amid high inflation, rising interest rates and falling property prices, with BMW and Stellantis highlighting weaker European order intake. The negative macroeconomic backdrop won’t necessarily translate into lower 2023 sales, given 2022 is set to match prior European and US recession lows. Indeed, pent-up demand and the need to rebuild inventory will last into 1H23, with unemployment (correlated to sales) as yet unmoved, but may mount if business’ battle with rising costs is lost.

China has the scope to outperform after a strong 3Q sales recovery following 1H Covid-19-driven lockdowns. The risk is new winter lockdowns and geopolitical unrest that’s weighed on sentiment for German automakers which rely on China for at least one-third of earnings.

Earnings downgrades loom on price risk, rising costs

EU automakers’ combined 2023 consensus Ebit has fallen modestly since September, though fails to reflect the multitude of headwinds the industry faces – including soaring input costs and a global recession – suggesting earnings downgrades loom. Projected 2023 sector Ebit remains double that of 2019, and assumes continued positive pricing and mix as production normalises amid waning consumer confidence, falling used-car prices and rising interest rates. Caution over new powertrain technology may also prolong consumers’ replacement decisions.

The shift to lower-margin BEVs will also pressure margin, as the profit incentive – to sell more vehicles than needed to meet current emissions legislation – will be limited until the introduction of next-generation models on digitalised platforms, with increased scale, from 2024.

Price discipline risk in 2023 as supply constraints ease

Strong pricing has been key for automakers in 2022, enabling them to achieve a positive price-mix and peak margin, though the easing of supply constraints just as orders slow may erode this, most notably in an industry with a poor record on price discipline. Indeed, used car prices have already starting to decline.

As the exhibit highlights, we see regional differences on net pricing with discounts as a percentage of list prices remaining high in Germany and France vs. the UK (where discounts remain historically low), based on Jato data. This contrasts with the US, where average discounts for the whole market were completely wiped out, with many brands selling vehicles at a premium since September 2021, according to Edmunds.com. Of note, discounts in Europe for BEVs include generous government subsidies.