Europe’s auto industry reaches a turning point. What direction now?
The automotive industry in Europe has reached a turning point. Stricter emissions rules, the growing influence of electric vehicles, and the arrival of major Chinese manufacturers have shifted the direction of the industry. The road ahead is far from clear.
The automotive industry in Europe has reached a turning point. Stricter emissions rules, the growing influence of electric vehicles, and the arrival of major Chinese manufacturers have shifted the direction of the industry. The road ahead is far from clear.
With passenger vehicle sales down 20% since the Covid economic shut-down in 2020, uncertainty surrounding further regulations, price volatility in the electric vehicle market, and the unclear policies of Chinese suppliers, automotive product and service providers in Europe need flexible strategies to keep on track. Rigid approaches based on historic performance run a high risk of failure.
Automotive companies have to identify and understand the many factors impacting their industry, such as new regulations and shifting production economics, and develop scenarios to prepare them for what’s ahead, says Max Müller, senior manager of automotive strategy consulting at Corporate Value Associates (CVA).
Müller was speaking at an online event hosted by CVA and the Qorus Mobility Community that discussed the influence of regulatory changes on vehicle volumes and prices since the Covid pandemic. Alongside speakers from CVA were representatives from European OEM Renault and auto dealer group Cosmobilis.
Müller points five forces changing the European automotive industry permanently.
1. Tightening emissions regulations: European Commission regulations, which compel manufacturers to produce more battery-powered vehicles (BEVs) to meet increasingly strict emissions targets, are defining the region’s auto market. High BEV production and low consumer demand are pushing down the prices of electric vehicles. By contrast, lower production volumes of internal combustion engine (ICE) vehicles, and strong consumer demand, are raising ICE prices. Manufacturers (OEMs) are forced to offset BEV costs with profits from contracting ICE vehicle sales.
2. Looming fleet emissions targets: Greening Corporate Fleet regulations, on track for approval by the end of 2025, would mandate 50% zero-emission vehicles for corporate fleets by 2027 and 90 to 100% by 2030. It is unclear whether the legislation will govern only large corporate fleets (around 24% of new car sales) or include other intermediaries such as leasing companies and rental firms (63% of sales).
3. New production economics: BEV manufacturers such as Tesla have shown they can drive down production costs. Tesla’s Model Y and Model 3 cars, for example, sell for less than they did in 2020 despite high inflation. Traditional European OEMs are under pressure to match the efficiency of the new generation of BEV suppliers while opportunities to cross-subsidize electric vehicle production from ICE profits are shrinking.
4. Government intervention: Ad hoc government interventions, such as the recent BEV grant in the UK and road tax exemptions in Germany, fuel uncertainty and stalls purchase decisions. The unpredictability and bureaucracy associated with such interventions further distort market dynamics while delivering limited long-term benefits.
5. Rising Chinese competition: Chinese OEMs account for 52% of global BEV sales and are fast expanding their presence in Europe. They currently hold 14% of the BEV market on the continent and are well placed to benefit from the European Union (EU) ban on new ICE sales from 2035. Their short product development cycles give them a significant cost advantage over traditional European OEMs.
The increasing production efficiencies of BEV manufacturers have triggered a structural shift in the automotive industry in Europe that will propel changes throughout the wider automobility ecosystem, says Markus Collet, partner at CVA and head of the firm’s automobility platform.
“This is not like the global financial crisis where there’s a liquidity crunch, it’s resolved and things eventually go back more or less to normal. If you have a structural decrease in the prices of electric vehicles it will over time change the entire ecosystem.”
Car sales in Europe have not returned to pre-Covid levels and the changing dynamics of the automotive industry are stalling signs of recovery.
Most executives polled at the online event doubt there’ll be much improvement, at least not in the next five years. As much as 55% believe volumes will stay at current low levels heading into 2030, while 25% expect volumes to return to 2019 levels and then grow moderately, 15% fear volumes will fall to minimally sustainable levels, and 5% anticipate a further two to three difficult years and then a pick-up in sales beyond pre-Covid levels.
Key to future vehicle sales will be the pricing trends of BEVs. With BEV prices continuing to fall as manufacturers cut production costs, they are likely to match prices for ICE vehicles around 2027, according to CVA projections. The current pricing gap threatens to slow renewal purchases as vehicle owners will be reluctant to shift from their ICE vehicles to equivalent BEV models that are more expensive, says Alexis Chalopin, VP European Affairs at Renault.
Chalopin is hopeful that potential changes in the regulatory framework, which would spread responsibility for emissions reductions beyond vehicle manufacturers, as well as innovations by automotive suppliers could spur an improvement in sales.
Among the innovations Renault is working on are entry-level BEVs. The compression of profit margins at traditional vehicle manufacturers in Europe has squeezed local entry-level A-Segment cars out of the market.
“Segment A has disappeared. Why? It was difficult to produce in Europe because the margins on these kinds of models are lower,” says Chalopin.
Key to a revival of A-Segment cars is greater regulatory flexibility, adds Chalopin. He points out safety features mandated by regulators have added considerable weight to small vehicles and manufacturers have had to increase the size of the engines needed to power them. But stripping out safety features to make a car affordable is not an option.
Shifts in BEV pricing have also had a dramatic effect on the residual value (RV) of used electric vehicles. Sudden price changes, rapid technology shifts in powertrains and batteries, changes to repairs and maintenance costs, and multiple lifecycles are forcing a rethink of residual value calculations. Traditional methods, developed for ICE vehicles, no longer work.
“When I was working for an operational leasing company and we are doing the RVs, it was perfect, our calculations were more or less to the last cent. Now if I'm predicting the RV of an electric vehicle, or even an ICE vehicle or a diesel, whatever you want, it's fairly complex,” says Stéphane Crasnier, Group Head of Mobility at Cosmobilis.
The growing influence of Chinese vehicle manufacturers is adding to the uncertainty about the future of the European automotive industry. Sales of Chinese BEVs and ICE vehicles are climbing, but it’s unclear whether regulatory intervention or difficulties establishing downstream support infrastructure might temper volume growth.
CVA’s Collet expects Chinese manufacturers to continue to grow their presence in Europe.
“If you want to see the canary in the coal mine look in Australia. Australia has a free trade agreement with China and the market share of Chinese OEMs is developing massively.”
To prepare for the changing and uncertain future ahead, CVA recommends that automotive companies take these steps:
1.Cooperate more closely with EU and local regulators: Emissions regulations are already affecting vehicle sales in Europe with OEMs compelled to increase the proportion of BEVs they bring to market. Pending Greening Corporate Fleet rules governing corporate fleet emissions look set to increase regulatory impact. Greater cooperation with regulators as well as local governments can help automobility firms gain clearer and more supportive long-term regulatory frameworks.
2.Revise approaches to vehicle residual values: The trajectory of BEV residual values differs considerably from traditional path of ICE vehicles. With many contributory factors still in flux, automobility firms need to draw up multiple scenarios.
3.Improve risk mitigation: Automotive firms such as vehicle dealers, leasing companies can better mitigate BEV risk by working more closely with OEMs. Buybacks and multicycle usage are some approaches that can improve risk management.
4. Increase BEV readiness: The arrival of BEVs has already structurally changed the dynamics of the automobility ecosystem and their influence will increase. Automobility firms need to further adjust to accommodate the impact of BEVs.
5.Develop deeper understanding of Chinese OEMs: Chinese vehicle manufacturers are fast increasing their share of the European market. But many lack extensive downstream service and support infrastructure. Automotive service providers need to understand the goals and strategies of Chinese OEMs to identify opportunities for collaboration and recognize likely structural shifts in the local market.
Europe’s automotive industry has reached a turning point, with the road ahead clouded by uncertainty. But companies can navigate their journey into the future by setting scenarios for differing price mixes, production levels, and regulatory intervention, and responding to triggers that will guide them as they refine and redirect their businesses.
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