The European Union will vote tomorrow on the introduction of tariffs on Chinese Electric Vehicles (EVs). Kevin Thozet, a member of the investment committee at Carmignac, considers the recent headwinds facing the European auto sector and looks ahead to tomorrow’s vote on the potential introduction of tariffs on Chinese Electric Vehicles (EVs). The risk, he states, is that action will be too little, too late.
Below is the complete analysis:
From sunshine to a perfect storm Having enjoyed a two-year period of double-digit margins, European car manufacturers are currently demonstrating that when it rains, it pours. The sequence of events is quite climactic. We’ve seen the drop in new car sales for August (-15% across the region for both EVs and petrol/diesel), rising costs as the sector transitions to EVs (with €270bn promised, there is no turning back) and the new CO2 emissions target per vehicle and associated fines overhang.
To top it off, there is the mammoth task of tackling EU EV competitiveness and the potential introduction of tariffs, on which the European Union will vote tomorrow (4 October). The share prices of European automakers are falling like autumn leaves The confluence of events has weighed heavily on the sector. The (latest) climax was Stellantis further cutting its yearly forecasts. The Italian automaker provides a telling example. With margins expected to move from 10% to 5% for 2024 - essentially guiding at an EBIT margin of 0% for the second half of the year – this means a cash burn of EUR 10 billion p.a. of working capital. This is a real blow to the investment thesis, as it could put the generous dividend at risk and will very likely imply saying “bye bye” to buybacks. The gauge for European carmakers (the MSCI Europe Automobiles) is now 25% lower than this year’s peak. The introduction of tariffs on Chinese EVs: a silver lining or storm clouds gathering? On 4 October, the European Commission will vote on whether to impose tariffs on imported EVs made in China.
Indeed, Chinese EVs are rapidly gaining market share to the detriment of their European counterparts. Now, one in four EVs sold in Europe are made in China. The European incumbents need time to ramp up production and step up to the sizeable challenges they face. Whispers are circulating that tariffs could be between 17% and 45%, but the enforcement of such a measure is up for debate, be it the timeline or magnitude. Two elements are important here. The first is the price gap between EU-made cars and China-made cars. It’s typically greater than 25%, hence, tariffs north of this figure would provide a more level playing field. The second is the disparity among EU countries. Germany exports 30 to 40% of its cars to China, so is expected to push-back in fear of Chinese retaliation. While France and Italy, among others, are expected to seek some form of protection for their domestic market which constitutes the bulk of revenue (for example, Stellantis has sold less than 70,000 cars in China).
As always, Europe must be a ground for compromise.
A concession – tariffs being implemented but at a lowered range of 10-25% - could provide short-term relief for a sector that has seen a sequence of bad news and where expectations have largely been reset. But the risk – as is often the case on the continent – is that action will be too little, too late. A middle-of-the-road approach will not address the competitiveness issue of the European automobile sectors.
