European Carmakers Will Report Impressive Profits, But War Ruins Short Term Prospects


Europe’s automakers will report strong profits for the first quarter in coming weeks, but the euphoria for 2022 based on the death of the coronavirus pandemic has been temporarily buried by the raging war in Ukraine and abetted by supply chain stutters, chip shortages, and a renewed outbreak of covid in China.

“We came into the year extremely bullish based on the potential for ’22 to be the clear beginning of a +25-30% multi-year production upturn. What went wrong – everything,” said investment researcher Evercore ISI in a report.

Evercore ISI said the combination of production cuts and spiking raw materials prices resulting from the Russia/Ukraine war, on top of now rising China covid risks, forced it to cut materially earnings per share forecasts for 2022. But it is confident the auto sector has a strong future.

“We still remain bullish on the outlook for a multi-year auto cycle but now see the group is in limbo until a Russian/Ukraine conflict resolution emerges,” it said.

The problem in China is looming larger for manufacturers as its harsh Omicron lockdowns are stalling supply chains.

Reuters’ Breaking Views column said the timing is terrible.

“The outbreak of war in Ukraine has made life harder too. Automakers were already facing crippling shortages of key components such as semiconductors, as well as soaring prices for raw materials. Batteries, for example, cost as much as 20% more, according to (investment researcher Bernstein). For carmakers, the year 2022 might just be an annus horribilis to rival 2020,” Breaking Views columnist Katrina Hamlin said.

Investment banker UBS also sees a solid set of first-quarter results for the industry, with Mercedes and Tesla

outshining all the others but suppliers continuing to suffer from production cutbacks.

“In light of latest supply disruptions in China and the Russia/Ukraine conflict, the tone will likely remain cautious across the board, and even (manufacturers) first-quarter beats (of forecasts) are unlikely to dispel concerns about demand destruction and margin pressure after 2022. However the latest order trend has remained solid for (manufacturers) based on our checks,” UBS said in a report.

European market leader Volkswagen has already published a preliminary report which showed first-quarter operating return on sales jumped to 13.5% in the first quarter from 7.7% in the same period of 2021, while operating profit before special items reached €8.5 billion ($9.2 billion) in the period. VW said €3.5 billion of that was due to commodity hedges after soaring raw material prices. VW warned that the Russia/Ukraine conflict might have a negative impact on its business, and it warned last month that its forecast that sales revenues would rise between 8 and 13% in 2022 was now at risk.

The industry in Western Europe has been relentlessly forced to slash back on rosy prospects for 2022. At the start of the year, industry consultants LMC Automotive was confidently predicting sales would bound ahead by a healthy 8.6%. But the unexpected invasion of Ukraine by Russia saw a correction to plus 3.6% and now the forecast is for a barely perceptible gain of 0.4% in 2022 to 10.63 million, far from 2019’s pre-covid peak of 14.29 million. Western Europe includes all the big markets of Germany, Britain, France, Spain and Italy.

The industry has also been supply-constrained, mainly because of chip shortages, resulting in a big order backlog and low dealer stocks.

Hopes that the chip shortage might be over in 2022 are having to be revised. VW has said it doesn’t expect a return to normality until 2024. BMW has said in 2023 there is likely to be a “fundamental shortage.”

After the long shutdown by the auto industry, the semiconductor makers had to look elsewhere for clients, and found many willing customers in the games industry, which itself was booming because many people in the west found themselves with time on their hands because of lockdowns. When the automakers decided it was time to restart production, their chip supplies had gone. Expensive new capacity will have to be added and that could take years.

But UBS said the situation might improve earlier, but for negative reasons, at least for the mass market sector.

“We are not yet convinced that chip supply will still be tight next year, due to the risk of lower demand. We think the premium segment will likely be more resilient than the mass segment,” UBS said.

Battery electric vehicles will also be spared disruption, but the semiconductor concern will be replaced by worries about battery availability in the years ahead.

Investment researcher Jefferies said it is getting concerned about car and SUV affordability because of inflation and shortages with the likelihood manufacturers will have to raise prices to maintain profit margins, while consumer confidence and disposable income is squeezed.

Evercore ISI though remains hopeful for sunlit uplands if the war ends quickly.

“Post-conflict resolution, we see a very strong argument for the second half of 2022 into 2023 resembling the golden years of 2013/2014,” it said.

New-car sales in western Europe increased 5% in 2014, the best result since 2009, growing to 12.1 million. Sales were still 2.7 million below their 2007 peak though.

Upcoming first-quarter results include Renault (April 22), Mercedes (April 27), Ferrari and VW (May 4), Stellantis and BMW (May 5), and Tesla (tomorrow).


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