EU auto industry headed for economic crash

THE effects of rising interest rates and record inflation are beginning to impact the demand for new vehicles at the same time manufacturers face higher raw material prices and growing energy and logistics costs across the European Union.

 

It’s a gloomy economic forecast analysts and automotive industry leaders say will see profits dwindle over the coming months.

 

According to a report published by Automotive News Europe (ANE) this week, Volkswagen’s financial arm says it expects earnings to decline in the latter part of this year as soaring inflation and interest rates begin to weigh on demand. Volkswagen Financial Services CFO, Frank Fiedler, said customers are debating whether to buy a new vehicle or push the leasing contract ahead a month over concerns surrounding the region’s increased energy prices.

 

The announcement comes at the same time BMW said its new-vehicle orders are slow, particularly in Europe. Last week, ANE reported that BMW said it may soon be forced to pass on rising materials costs to its customers, and that energy cuts may slow production over the fast-approaching winter months.

 

Further, ANE reports that German automotive parts manufacturer Continental said it is expected to shoulder the burden of an additional €3.6 billion ($A5.2b) in additional costs for raw materials and energy and logistics, with company CFO Katja Duerrfeld reporting an eightfold increase in the cost of overseas shipping containers in some cases.

 

“The current headwind is rather like a hurricane and (it) will not subside anytime soon,” Ms Duerrfeld told ANE.

 

“We cannot be entirely satisfied with our current business results – even if they are as expected – but we are optimistic for the second half of the year.”

 

Continental lost €251 million ($A362.8m) in the April-June quarter this year amid lockdowns in China, supply chain issues and higher interest rates. It has responded by spreading its purchasing across multiple sources, stocking higher inventory quantities, sharing costs with its customers and focusing on more premium products.

 

The German economy, Europe’s largest, stagnated in the second quarter as cost-of-living pressures, supply shortages and the threat of energy rationing from Russia took their toll. European economists now believe a recession is “almost inevitable” in the second half of 2022, potentially equalling the scale of that seen in the early 1990s.

 

ANE says car manufacturers have managed to avoid the impacts of mounting financial pressures “for quite some time” but say slowing sales across the European Union mean it is increasingly unlikely that they will be “able to outrun the economy’s underlying issues for much longer”.

 

Further, and on top of limited supplies of Russian gas used for electricity production, the current drought in Europe has seen vital waterways used to ship coal to Europe’s car manufacturing factories all but dry up.

 

Irish-American auto parts supplier Aptiv said it was facing similar issues and that winter energy rationing may force it to idle its European production facilities. The company forecast a five per cent cut to European vehicle production before the end of the year.

 

Speaking to ANE this week, RBC Capital Markets analyst Joe Spark said Aptiv “has been historically more right than wrong in calling production trends” and that if Aptiv is correct then there is significantly more risk to other suppliers, especially in the European Union.

 

The news comes the same week as Australia’s peak automotive body, the Australian Automobile Association (AAA) issued its latest quarterly Transport Affordability Index showing average weekly fuel costs rose more than five per cent to $100.39 a week across the country in the past three months.

 

As well as paying more for new cars – and waiting longer to receive them – Australian consumers are also being asked for more to fuel, insure and service their vehicles than ever before with the typical weekly household transport cost in capital cities is now $412.21 and $342.98 in regional households.

The AAA says that nationally, transport costs now represent 15.2 per cent of household income.