The European automobile industry finds itself at a critical juncture as it transitions toward electrification.
Mounting competition from Chinese manufacturers, stricter carbon regulations, and subdued demand for electric vehicles (EVs) are creating a volatile environment.
Industry analysts warn that the challenges of 2024 will likely persist into 2025, with little respite for automakers, according to a report by CNBC.
EV transition faces bottlenecks
The shift to EVs has proven more difficult than anticipated for Europe’s automakers.
While many governments are pushing for faster adoption, the industry faces several bottlenecks.
The availability of affordable EV models remains limited, and the rollout of charging infrastructure has been slower than promised.
Interest rates, which have risen sharply over the past year, have also weighed heavily on consumer demand.
Julia Poliscanova, senior director for vehicles and e-mobility supply chains at Transport & Environment, said automakers are partly to blame for their current predicament.
“They are behind on electrification, their products are just not as good as the formidable Chinese competition – and that is not anyone’s fault but the carmakers,” Poliscanova told CNBC, emphasizing that car sales in Europe remain below pre-pandemic levels.
Rules on emissions another issue for automakers
A critical issue facing automakers is the European Union’s tightening cap on average emissions from new vehicle sales.
Starting in 2025, the cap will drop to 93.6 grams of CO2 per kilometer, a 15% reduction from the 2021 baseline.
Exceeding these limits could result in hefty fines, adding financial strain to automakers already grappling with supply chain disruptions and softening demand.
The European Automobile Manufacturers’ Association (ACEA), which represents major players like BMW, Volkswagen, and Renault, has urged regulators to ease compliance costs while maintaining the broader goals of green mobility.
The ACEA cited sluggish EV sales and a deteriorating economic climate as reasons for flexibility.
Critics, however, argue that any relaxation of regulations would harm Europe’s long-term competitiveness.
“Delaying the targets is not a solution,” said Poliscanova. “It will only delay the inevitable transition that automakers need to undergo.”
Poliscanova described calls for looser regulations as “really frustrating,” arguing that tougher targets are essential to drive innovation and competitiveness.
Bank of America’s Horst Schneider offered a more pragmatic view, suggesting that some flexibility might be necessary to help automakers bridge the gap between EV costs and consumer acceptance.
“The pricing gap between EVs and internal combustion vehicles is still too wide, and mass-market carmakers need more time to adjust,” Schneider said.
Chinese competition poses a growing threat
Chinese carmakers have quickly become a dominant force in the EV market, leveraging their expertise in affordable production and efficient supply chains.
European automakers, by contrast, have been slower to scale their EV offerings.
This disparity is increasingly evident in market dynamics.
Chinese brands have captured significant market share in Europe by offering high-quality EVs at lower price points, leaving traditional European brands scrambling to compete.
“The gap is clear,” said Poliscanova.
“European automakers are behind on electrification, and their delay only makes it harder to compete against China’s advanced offerings.”
Market performance: Auto stocks struggle
The financial challenges facing Europe’s automakers are mirrored in their stock market performance.
Shares of the “big five” — Volkswagen, BMW, Mercedes-Benz, Stellantis, and Renault — have seen significant declines in 2024, with Stellantis suffering the steepest drop at 37% year-to-date.
Volkswagen and BMW have also faced double-digit losses, while Renault has been the lone bright spot.
The French automaker’s shares have climbed 19% amid hopes that its limited exposure to the US and Chinese markets might insulate it from some of the global headwinds.
Despite Renault’s relative success, analysts at Deutsche Bank maintain a cautious outlook for the broader industry.
“Automotive stocks are having a hard time globally,” analysts at Deutsche Bank said in a research note published Dec 9.
“Unfortunately, we believe the industry is likely to head into another year of volatility and headwinds across regions. We expect more noise of potential policy implications in the US, further restructuring announcements in Europe, muted demand ex China and pricing to soften,” they added.
Cheaper EVs key to Europe’s EV transition, say analysts
Affordability has emerged as a central challenge for Europe’s EV transition.
While several automakers unveiled low-cost EV models at the Paris Motor Show in October, these vehicles are not expected to reach the market until 2025.
Analysts believe that bridging the price gap between EVs and traditional internal combustion vehicles will be critical for boosting consumer demand.
“What people need is cheaper EVs, and those are still in development,” said Schneider.
Cheaper EVs could help automakers reclaim market share from Chinese competitors and accelerate the transition to green mobility.
However, this will require significant investment in production efficiency and battery technology.
Challenges likely to persist in 2025
The economic backdrop for the European auto industry remains challenging.
Higher interest rates, muted demand outside of China, and pricing pressures are likely to persist in 2025.
Rico Luman, senior sector economist for transport and logistics at ING, said profitability would remain a concern as automakers shift their focus to less lucrative EV models.
“They tend to focus on hybrids because of the profitability, but if they are forced to move fully to EVs, it will affect their financials,” Luman told CNBC.
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