European Automakers Are Paying The Price For Making Cars For No One

European carmakers, taken as a whole, have made some questionable product decisions over the last few years. As global companies, they’ve tried to make money selling cars in China, the United States, and Europe. This has largely been a strategy that’s worked. Now something is changing.

It’s hard to put a finger on exactly when this happened, but after a decade of globalized cars and globalized platforms the world changed and now Europe, China, and the United States have become more differentiated. Most brands have charted a way forward, balancing home markets and exports, but European carmakers seem to have been the ones caught most flat-footed.

This end-of-the-month Morning Dump is all about exogenous threats. Europe is greatly at risk of falling further behind China and has to come to some sort of compromise to save itself and save the planet at the same time. The United States, being the world’s greatest market, is less at risk of falling to China because it has decided to protect itself. Of course, all of this talk of American companies continuing to prosper must exclude Stellantis, which is now facing its second big strike in roughly a year.

And, finally, we’ll talk about the mother of all exogenous threats: Mother Nature.

Europe Is Beginning To Recognize Its Screwedness

The question I asked at the beginning of this month was “How screwed is the European car industry?” and the answer, at least according to Q3 revisions, is: very. Most of Europe’s major automakers are having to concede that times are tough.

Here’s a decent wrap-up from Reuters:

Volkswagen cut its annual outlook for the second time in less than three months on Friday, citing a weaker-than-expected performance at its passenger car division as pressure on Europe’s top automaker continues to rise.

The lowered outlook is the latest from Germany’s car giants, with Mercedes-Benz and BMW both downgrading their annual forecasts earlier this month as a result of weakening demand in China, the world’s biggest car market.

They’re not alone, here’s Automotive News on what’s happening with Stellantis:

Stellantis cut its profit margin forecast for the year, citing higher costs to revive its struggling Jeep and Dodge businesses in the U.S., Chinese competition and a global slowdown in the auto industry.

Adjusted profit margin is now expected to be between 5.5 percent and 7.0 percent for the year, down from the “double digit” level previously forecast, Stellantis said in a statement.

The Chinese automotive market isn’t in great shape right now. In fact, few car markets are in great shape right now. Europe is facing weakening demand at home. China’s demand is down, but mostly for traditional ICE vehicles, as anything with a plug is having a great year (EVs are up 33% and Plug-in Hybrids are up 74% year-over-year).

I think all of this “oh, it’s China” talk glosses over the fact that European automakers aren’t building cars that China wants and are getting their asses kicked both by domestic brands like BYD and Changan as well as by Tesla, which probably had a huge third quarter in the country.

It’s a wild reversal, as China has become the most important market for Volkswagen, Mercedes, and BMW (less so Stellantis). Let’s look at Volkswagen, which has probably been the most successful European automaker in China since the ’90s. Sales were down in the first half of the year, including a drop of more than 25% for electric vehicle sales from Q1 to Q2 in China. That sucks. By my math, Volkswagen sells about as many EVs in a quarter in China as Tesla sells there in 10 days. VW is also reportedly planning on closing more plants in China after demand falls for its JV-produced products.

This is also true for Mercedes and BMW, which still make popular gas-powered cars, but haven’t built a truly great electric car for that market yet:

For Mercedes and BMW, more than 90% of the top-end S-Class and BMW 7-Series vehicles in China are still ordered with combustion engines, managers said at the car show in Beijing in April. Meanwhile, even heavy price cuts in China have failed to stoke demand for the EQS, the electric sibling to the S-Class.

China will still buy German cars (assuming retaliatory tariffs don’t make them too expensive), but they aren’t the cars of the future. If you’re going to be successful in China in the future at high volumes you’re going to need a car that plugs in. It’s as simple as that.

What about Europe? I think European automakers are still good at making cars for their home markets. Stellantis, in particular, is picking up market share on the continent with cheap Peugeots and Fiats. The problem for most European automakers is the same problem Chinese automakers have, which is that they have too much production capacity to not be exporting cars. Europe will need a positive economic jolt to get people to buy vehicles again. This is complicated by the fact that Europe keeps pushing automakers towards electrification. The easy solution to this is to import a lot of cheap Chinese cars. The problem? That’ll kill the domestic car industry.

So China is tough, Europe is tough, what about the United States? Here it’s a little more mixed. Stellantis is way behind on updating its products and, aside from the Ram and Wrangler, doesn’t have any cars I’d consider truly competitive in their classes (and both the Ram and Wrangler are getting a bit old). The new Atlas is fine, but Volkswagen is also in trouble in the United States. What’s the next great VW product?

Here’s where BMW and Mercedes do a little better. BMW sales were up slightly year-over-year last quarter as it still makes a lot of popular crossovers/SUVs and even its EVs are up a little thanks, presumably, to good lease deals. Year-to-date Mercedes sales were down about 5% year-over-year in the first half of 2024, but it’s possible that the company can turn that around in the second half of the year. If Mercedes does turn it around it won’t be on EV sales, which were down considerably in the first half of the year.

This brings me back to my original point: Who is Europe building cars for? Chinese automakers are taking over their domestic market, American automakers have a lead on pickup trucks and a big piece of the crossover market, and Europe is not likely to see significant growth anytime soon. The dream of the global platforms that dominated the first part of this century is turning into a nightmare as European automakers make a lot of cars that are being outmatched.

The best contrast is with Japanese and South Korean automakers, who face the same domestic headwinds and the same competition in China. How have companies like Honda, Toyota, and Hyundai done well? All of these companies are way more tied to success in the United States than they are to China and build cars (especially hybrids) that do well in this extremely important market.

European automakers need to dramatically rethink who they are building cars for and what that looks like.

The United States Could Lose 25,000 Car Sales If China’s Ban Goes Forward (No That’s Not A Lot)

The United States is going to protect its automakers. Given that many of them are in places like Georgia, Ohio, Michigan, and Pennsylvania we are going to, as a country, prioritize a relatively small group of mostly factory workers in a handful of states. There are few bipartisan issues anymore, but this is one of them.

The Biden Administration’s plan to ban “connected vehicles” from China is essentially a ban on all Chinese-built cars in the United States.

From Reuters’ piece “US auto sales could fall by 25,000 a year under rules barring Chinese vehicles”:

The Commerce Department proposes making software prohibitions effective in the 2027 model year, while the hardware ban would take effect in the 2030 model year or January 2029. The public has 30 days to make comments before the rules can be finalized.

The Commerce Department said the rules’ primary benefit would be “a reduction in the chance of a catastrophic attack due to the exfiltration of data and remote manipulation of connected vehicles.”

Have you seen what people are doing with pagers? Maybe it’s not a terrible idea. Right now most Chinese cars being imported are the Buick Envision and Lincoln Nautilus, but this could also impact the Geely brands of Volvo, Polestar, and Lotus.

This isn’t a huge number of cars, of course, because this market is basically “protected” from cheap Chinese cars.

The UAW Is Ready To Strike Stellantis

The UAW’s massive stand-up strikes started just a year ago. The hope was that the historic contracts won by the auto workers would prevent more strikes. That’s not what’s happening as UAW President Shawn Fain is claiming that Stellantis is already reneging on its deal and telling workers to be ready to strike according to this Facebook post:

“The evidence is clear that CEO Carlos Tavares is steering Stellantis on a crash course that will cause our members tremendous harm. Given all that we heard, we resolved to meet this make-or-break moment without fear and to fight for the rights of our members,” according to the letter, which the union posted on its Facebook page. “We unanimously recommend to the membership that every UAW worker at Stellantis prepare for a fight, and we all get ready to vote yes to authorize a strike.”

Cool, because that’s what Stellantis needs right now… although, you don’t have to put incentives on a car you never built!

Helene Will Also Damage Car Sales

The photos and videos coming out of Florida, Georgia, Tennessee, and North Carolina are heartbreaking and another reminder of the power of Mother Nature. While cars being destroyed is not the worst nor most devastating outcome, it’s a big deal for the communities impacted.

From Automotive News:

Ted Smith, president of the Florida Automobile Dealers Association, told Automotive News there are “serious flooding issues in Tampa Bay,” including at Ken Ganley Kia New Port Richey, just north of Tampa and Clearwater, Fla.

Ken Ganley, CEO of his namesake group based near Cleveland, woke up to a flood of missed calls and texts.

“It was about 6 a.m., and I looked at my phone, and said, ‘Oh, God, something’s wrong,’ ” Ganley said.

He said the Kia store in New Port Richey, off Florida’s battered U.S. Route 19, took on at least four feet of water, lost power and could lose up to 700 vehicles.

In addition to new and used vehicles at car dealerships, I keep seeing videos of flooded cars so we might end up with another massive impact on the used car market more broadly.

What I’m Listening To While Writing TMD

I was having a debate all yesterday over which song from Kris Kristofferson to play to memorialize him. His original version of “Me and Bobby McGee” or maybe The Highwaymen again? But I love the simplicity of “To Beat The Devil.”

The Big Question

Which European automaker is most ready for the future?