European Carmakers will Report Impressive Profits but War Ruins the Short Term Prospects

Europe’s automakers are expected to report strong profits in the next weeks for the first quarter. However, the optimism for 2022 that was based on the death coronavirus pandemic and the raging conflict in Ukraine has been temporarily subdued by supply chain stutters and chip shortages and a new outbreak of covid from China.

We were extremely bullish about the potential for ’22 as the beginning of a +25-30% multiyear production upturn. In a report, investment researcher Evercore ISI stated that everything went wrong.

Evercore ISI stated that the combination of production reductions and rising raw material prices due to the Russia/Ukraine conflict, along with rising China covid risk, caused it to reduce its material earnings per share forecasts through 2022. It is optimistic that the auto industry has a bright future.

It stated that while we remain optimistic about the prospects for a multiyear auto cycle, we now believe the group is stuck until a Russian/Ukraine conflict resolution emerges.

Manufacturers face a bigger problem in China as China’s harsh Omicron lockdowns stall supply chains.

Reuters’ Breaking Views column stated that the timing was terrible.

“The Ukrainian war has made our lives more difficult.” Automobile manufacturers were already faced with severe shortages of key components like semiconductors and soaring raw material prices. According to Bernstein, an investor, batteries can cost up to 20% more. According to Katrina Hamlin, Breaking Views columnist, 2022 could be just as bad as 2020 for carmakers.”

UBS, an investment banker, also sees solid first-quarter results in the industry with Mercedes and Tesla
TSLA
Outperforming all others, but suppliers continue to suffer from production cuts.

“In light the latest supply disruptions from China and Russia/Ukraine conflict the tone will likely stay cautious across the board. Even (manufacturers’) first-quarter beats of forecasts are unlikely to dispel concern about demand destruction, margin pressure after 2022. UBS reported that the order trend for (manufacturers), based on our checks, has remained stable.”

The European market leader Volkswagen published a preliminary report that showed that the first quarter operating return on sales rose to 13.5% from 7.7% in 2021. Operating profit before special items was EUR8.5 billion, or $9.2 billion. VW claimed EUR3.5 billion was due to commodity hedges following the soaring prices of raw materials. VW warned that Russia/Ukraine conflicts could have a negative effect on its business. Last month, VW stated that its forecast of sales revenues rising between 8 and 13% by 2022 was at risk.

In Western Europe, the industry has been forced to cut back on its optimistic outlook for 2022. LMC Automotive, an industry consultant, predicted that sales would rise by 8.6% at the beginning of the year. The unexpected Russian invasion of Ukraine saw a correction of plus 3.6%. Now, the forecast is for a tiny gain of 0.4% in 2022 and 10.63 million. This is far below 2019’s pre-covid peak at 14.29 million. All the major markets in Western Europe include Germany, Britain and France as well as Spain, France, Spain, Italy, and Spain.

Due to chip shortages, the industry has been severely supply constrained. This has led to a large order backlog and low dealer stocks.

The hope that the chip shortage will be ended in 2022 is being reaffirmed. VW stated that it does not expect normality to return until 2024. BMW stated that in 2023, there will likely be a “fundamental shortfall.”

The long-term shutdown of the auto industry forced semiconductor manufacturers to search for new clients. They found many willing customers in games, which was growing because so many people in western countries had little time due to lockdowns. Their chip supplies were gone when the automakers decided that it was time for production to resume. It will be costly to add new capacity, which could take many years.

UBS stated that the situation could improve sooner, but not for positive reasons.

We aren’t convinced that chip supply will remain tight next year due to lower demand. UBS stated that they believe the premium segment will be more resilient than those in the mass segment.

The disruption of battery electric vehicles will also not be experienced, but concerns about the availability of batteries in the future will replace the semiconductor concern.

Jefferies, an investment researcher, said that it is becoming concerned about SUV and car affordability due to inflation and shortages. Manufacturers will likely have to increase prices to maintain profit margins while consumers are less confident and their disposable income is being squeezed.

Evercore ISI is optimistic for sunlit uplands, even if war ends quickly.

It stated that after a post-conflict resolution, there is a strong argument for 2022 to 2023 as a second half, resembling 2013/2014’s golden years.

Western Europe saw a 5% increase in new car sales, their best performance since 2009. It reached 12.1 million. However, sales were still below 2007 peak of 2.7 million.

The following first-quarter results are expected: Renault (April 22), Mercedes, (April 27), Ferrari (May 4), Stellantis (May 5), VW (May 4,), Mercedes (April 27), Ferrari (May 4), Mercedes (April 27), Ferrari (May 4), Stellantis (May 5), BMW (May 5), Tesla (tomorrow).

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