MW Europe's car makers could be set for rebound in 2025, Morgan Stanley says

By Louis Goss

Europe's top car manufacturers could be on track for a major recovery in 2025, Morgan Stanley's analysts said.

Car makers including Volkswagen (XE:VOW) (XE:VOW3), Stellantis $(STLA)$, Mercedes-Benz (XE:MBG) and BMW (XE:BMW) have all issued profit warnings this year as elevated energy prices, slumping sales in China, and slower than expected uptake of electric vehicles have hit their businesses.

However, Morgan Stanley's analysts, led by Javier Martinez de Olcoz Cerdan, said they believe the worst of those car makers' troubles may now be behind them, particularly if affordability continues to improve.

The affordability of new cars in Europe fell to historic lows at the end of 2023 due to a combination of high interest rates and elevated production costs that saw prices rise to 20% to 30% above pre-COVID levels.

Morgan Stanley's analysts said that they believe the situation is now on course to improve dramatically in 2025 - in line with rising incomes and falling interest rates - even as list prices for new cars stay at elevated levels.

The analysts said the possible introduction of new government support for Europe's auto makers, in response to mounting competition from Chinese EV makers, could also further boost top car manufacturers prospects over the coming year.

In a visit to Ford's EV factory in Cologne on Tuesday, Germany's chancellor Olaf Scholz called for new support for Europe's car manufacturers, including subsidies for battery makers.

In September, a report by former European Central Bank (ECB) governor Mario Draghi noted Europe's car makers' production costs are currently around 30% higher than those of their Chinese rivals.

Draghi's report said heavy regulation had seen the European Union's car makers fall behind their rivals in the U.S. - where manufacturers have received a boost from the Inflation Reduction Act (IRA) - and China - where the state has helped coordinate the building up of EV production supply chains.

The situation has seen Chinese car manufacturers continue to make profit on EVs and parts sold in the European Union, even in the face of new tariffs on Chinese EVs that range from 7.8% to 35.3% in addition to the 10% tariffs on imported cars.

China's EV makers are also more technologically advanced than their European counterparts "in virtually all domains," the Draghi report says, as it notes many of Europe's legacy car manufacturers are currently struggling to make EVs profitably.

Higher energy costs and labor costs that are 40% higher than in China have also undermined European car manufacturer's profitability, Draghi's report says.

In Morgan Stanley's view, the situation facing the EU's car makers will likely see them forced to form "strategic alliances" with their Chinese rivals, who are on course to continue capturing an increasing share of the European market either way.

Strategic alliances with Chinese EV makers could boost European car maker's prospects by lowering their production costs and giving them access to Chinese EV manufacturers state-of-the-art technology, Morgan Stanley's analysts said.

Joint ventures with Chinese EV makers could, in turn, help boost European car maker's sales in price-sensitive markets in Africa, Asia, and Latin America, by helping Europe's auto companies cut their prices.

-Louis Goss

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December 11, 2024 08:13 ET (13:13 GMT)

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