"Lead"

In recent times, in stark contrast to the continuous and rapid rise in domestic stock markets, European auto stocks have been on a downward trend. The weakness in the European and American auto markets has put many automakers in Europe and the United States in a difficult position.

Produced by | Heyan Yueche Studio

Written by | Zhang Chi

Edited by | Heyan

2583 words in total

4 minutes to read

On October 4, the EU also formally voted to impose punitive tariffs on electric vehicles produced in China, with the tariffs to remain in place for five years. This means that the negotiations between domestic auto companies led by the Ministry of Commerce and the EU over the past six months have failed to substantially change the EU's restrictions on electric vehicles produced in China.

△ After months of arduous negotiations, the EU has still decided to impose tariffs on electric vehicles produced in China

The imposition of these tariffs was not unexpected. On September 30, European auto stocks fell nearly 4% during trading, with the market value of the STOXX Auto & Parts index evaporating by nearly $10 billion. Among them, Stellantis' share price fell by 14%, Aston Martin by over 23%, Renault by nearly 6%, and Volkswagen by 2.7%. The main reason for the sharp decline in European auto stocks was that major European automakers, including Stellantis, Volkswagen, Mercedes-Benz, and BMW, all downgraded their performance expectations for this year. It cannot be denied that the entire European auto market is permeated with a sense of pessimism, so it is not surprising that electric vehicles produced in China are being blocked from entering the domestic market.

Reasons for the weakness of European automakers vary

The main reason for the sharp decline in Stellantis' share price was its announcement on September 30 that its adjusted operating profit margin for this year would decline to 5.5%-7%, lower than the previously predicted double-digit percentage; the company's and this year's free cash flow would be between -€5 billion and -€10 billion, while the company had previously predicted positive cash flow for this year. The reason for this situation is that Stellantis currently maintains high inventory levels. To reduce the burden on dealers, Stellantis will reduce production by 200,000 units in the second half of this year and increase promotional efforts to achieve the goal of not exceeding 330,000 dealer inventories by the end of this year.

△ Stellantis' high inventory in North America has put considerable operating pressure on the entire group

The situation is not much better for the German Big Three of Volkswagen, Mercedes-Benz, and BMW. Earlier, Mercedes-Benz also revised its performance guidance for this year, predicting that its annual EBIT (earnings before interest and taxes) will be "significantly lower" than the previous year, which led to a flash crash of up to 8% in its share price during trading. BMW also lowered its full-year earnings forecast from the previous 8%-10% to 6% in early September. Volkswagen similarly announced that it would revise down its revenue, profit, and cash flow forecasts for this year, based on the company's expectation that global vehicle deliveries will decline from the previous forecast of 9.24 million to around 9 million in 2024.

In fact, the reasons for the difficulties faced by Stellantis and German automakers are different.

Stellantis' current problems are mainly in the North American market. Stellantis North America's profits have plummeted 48% in six consecutive months, and before that, Stellantis had already initiated several rounds of layoffs and capacity reductions in North America, but the results were not significant. Moreover, its current CEO, Carlos Tavares, whose contract will expire in early 2026, is looking for a new successor. As for the German Big Three, their main challenge comes from the challenges they face in the Chinese market. As the main source of sales and profits for German automakers, those who have missed the boat on new energy and intelligent connectivity have fallen behind in the domestic market. In the short term, the Chinese market will not provide new growth momentum for the German Big Three, and it is already remarkable that these three once-glorious automakers can maintain their current levels. To this end, Volkswagen has also resorted to closing factories and laying off employees. However, Volkswagen's powerful labor union, in conjunction with the local government of Lower Saxony, strongly opposes this, and there have even been rumors that Volkswagen Group CEO Oliver Blume's position is shaky.

△ German automakers have been slow to find the key to unlocking the Chinese electric vehicle market

It's not just European automakers facing increasing challenges. International investment bank Morgan Stanley has also downgraded its ratings for U.S. auto stocks, including General Motors, Ford, Rivian, and other automakers. Amid high-interest rates over the past period, both European and American automakers have generally faced insufficient demand. In the coming period, central banks in Europe and the United States will take aggressive steps to cut interest rates to stimulate the economy. Only when the economy fully recovers will consumer spending in Europe and the United States return.

Pressure from the Euro 7 emissions regulations

For European automakers, there is also the looming implementation of the Euro 7 emissions regulations in July 2025. The Euro 7 regulations are stringent, requiring that the average CO2 emissions per kilometer of new vehicles be reduced from the current 116 grams to 93 grams. For every additional gram of CO2 emitted per kilometer, each newly registered vehicle will be fined €95.

△ The Euro 7 emissions regulations will pose a significant challenge to traditional European automakers

Currently, larger automakers such as Volkswagen and Renault are unable to meet the Euro 7 regulations. Originally, automakers hoped to reduce overall CO2 emissions by selling more electric vehicles. However, Germany abruptly abolished electric vehicle subsidies at the end of last year, leading to a continuous decline in the share of electric vehicle sales in Europe, thwarting automakers' plans.

△ Automakers like Renault and Volkswagen, which primarily sell fuel-powered vehicles, are facing challenges from the Euro 7 regulations

Currently, major European automakers are actively lobbying the EU to postpone the implementation of Euro 7 or even change the EU's regulation banning the sale of all fuel-powered vehicles by 2035. However, from the EU's broader perspective, promoting energy conservation and emissions reduction is an established national policy. But given the current economic situation, aggressive emissions reduction targets undoubtedly impose a heavy burden on local automakers. While companies with smaller scales and more established new energy vehicle portfolios, such as Tesla and Volvo, will advocate for the implementation of Euro 7 and the ban on fuel-powered vehicle sales by 2035, automakers like Volkswagen, Stellantis, Mercedes-Benz, and BMW may not be ready. If the Euro 7 timeline cannot be changed, automakers may have to pay a substantial amount next year.

△ Only a few smaller automakers in Europe will be able to escape unscathed from the Euro 7 regulations

What is the outlook for Chinese automakers?

For Chinese automakers, the poor performance of European and American automakers is certainly not good news. In both the United States and the EU, the automotive industry is a pillar industry, involving a large number of jobs and affecting people's livelihoods. Therefore, once expectations deteriorate, these companies will inevitably pressure their governments: whether it is to postpone the implementation of new regulations or to use tariff weapons to block the export of more cost-effective Chinese cars, these options will be on the table. The European Parliament's approval of a five-year punitive tariff on electric vehicles produced in China on October 4 is a prime example of this.

△ Chinese electric vehicle exports to the EU market will face a five-year tariff barrier

The EU's imposition of higher tariffs on electric vehicles made in China ultimately stems from the fact that locally produced electric vehicles lack competitiveness and are costly. Since the EU cannot introduce electric vehicles that can compete with those from China in the short term, it has simply blocked Chinese electric vehicles from entering its borders. As for the United States, which raised tariffs on Chinese electric vehicles to 100% this year and banned the use of Chinese suppliers' products related to connected vehicles and autonomous driving, this is more related to the upcoming elections at the end of the year. Candidates from both parties in the United States are banning Chinese cars from entering the U.S. market under various pretexts to win votes from American industrial workers. Therefore, given the outlook for local automakers in the EU, it is unlikely that they will ease restrictions on Chinese automakers in the short term.

△ Using Chinese connected vehicle and autonomous driving-related hardware and software will prevent access to the U.S. market

Commentary

Compared to the United States' comprehensive containment of China, while the EU restricts the sale of electric vehicles produced in China within the EU, it does not restrict China's investment in factories in the EU or the transfer of technology to European automakers. The EU is concerned that the dumping of China's excess electric vehicle production capacity will deprive the EU of its GDP and job opportunities, which is fundamentally different from the original intention of the U.S. government. Therefore, it is feasible for Chinese automakers to build factories locally in the EU or to cooperate with automakers like Volkswagen and Stellantis, as Xpeng and NIO have done. However, the current situation is that local automakers in the EU are performing poorly, government subsidies for electric vehicles continue to decline, and there are even rumors that European automakers intend to lobby the EU to abandon the policy of banning the sale of all fuel-powered vehicles by 2035.