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Car dashboardsVWVWBMWVWBMWEVVWBMWEUEVevevbydubsVWubsBMWsuvVW EUbmweuVWVWYour browser does not support the element. have an array of indicators that illuminate to warn of trouble. If the boardrooms of Europe’s carmakers had similar systems they would be lit up like a Christmas market. Volkswagen (), the largest of the lot by sales, is bracing for strikes beginning on December 1st in response to its plan to close three factories in Germany and cut wages. , a once-promising Swedish battery startup in which and invested, has collapsed into bankruptcy. Meanwhile, across the Atlantic, Donald Trump is threatening to upend supply chains by on imports from Mexico and Canada.These troubles come amid an already difficult year for Europe’s auto industry. Since April the combined market value of the continent’s five biggest carmakers by sales—, Stellantis, Renault, and Mercedes—has plunged from more than €300bn ($320bn) to below €200bn, as a string of gloomy profit forecasts has spooked investors (see chart). In Europe demand has shrunk and competition is intensifying from Chinese electric-vehicle () firms. “The pie has become smaller, and we have more guests at the table,” Oliver Blume, vw’s boss, has said. At the same time, the overseas businesses of European carmakers have hit a pothole. Sales in China have slumped, and profits in America are under threat, too. Philippe Houchois of Jefferies, a bank, describes it as “a downturn like no other”. Yet efforts to slash costs at home to stay competitive are hitting stiff resistance from unions and politicians.Not long ago European carmakers were on a tear. A shortage of microchips during the pandemic helped them pursue a strategy of “value over volume”, as they prioritised putting scarce chips into their most profitable vehicles. broke its record for operating profit each year from 2021 to 2023. Stellantis (whose largest shareholder, Exor, is a part-owner of ’s parent company) generated its highest-ever revenue and profit in 2023. and Mercedes also enjoyed bumper years. A also began to pay off.Lately, however, the picture has darkened. Demand for cars in Europe has stalled and may be headed for structural decline. Europe will never return to its pre-pandemic heights of 16m sales a year, concedes Arno Antlitz, vw’s chief financial officer. In 2023 total sales were a little over 11.5m vehicles, up on the previous year but well below their peak. This year they are expected to be lower, and few in the industry forecast much growth next year.As the chip famine has ended, production has swung back towards less profitable cars. Margins are likely to dwindle further if price wars break out to meet stiff new emission targets on the ’s path to banning sales of petrol cars by 2035. Stricter rules next year will require a higher share of vehicles the industry sells to be s, which are currently less profitable than fuel-guzzling ones.European carmakers are also being squeezed on price at home by Chinese competitors. Although there was a small dip after tariffs on imported s were introduced by the European Union in October, Chinese carmakers still account for one in ten sales of new s in Europe, according to Schmidt Automotive Research, a consultancy. That share will rise further. and Chery, two Chinese carmakers, are setting up factories in Europe to serve the continent directly.Meanwhile in China, European firms are losing out to domestic rivals. The world’s largest car market has long been an important source of profit for Europe’s auto industry. Those days are drawing to an end. According to , a bank, foreign brands’ market share has plummeted from 63% in 2020 to 37% now, with Chinese carmakers proving better at stuffing their vehicles with the whizzy technology that the country’s consumers demand. has been hit especially hard. Once the biggest car company in China by some distance, its market share has fallen from 19% in 2019 to 14% today. It may slip into the single digits by 2030, says .Business in China is also getting harder for Germany’s upmarket firms. and Mercedes earn 48% and 37% of their operating profit, respectively, in the country. Although they have so far shed only a few percentage points of market share, both rely heavily on petrol cars in a country where half of sales are now electric. The sales in China of Porsche, another fancy European brand, have plunged by 27% since 2022.Stellantis, which has largely pulled out of China, is nevertheless in a battle with Chinese competitors in South America and the Middle East, both important regions for the firm. Its bigger problem, though, is its plunging profit in North America. A misguided decision to raise prices for its pickups and s, to bring them closer to those of Ford and General Motors, has backfired as customers have turned away. Last month it announced that its North American revenue fell by 42%, year on year, in the quarter from July to September. Ballooning inventories have led it to cut production and temporarily close factories.The American market is set to become thornier still for European carmakers under Mr Trump. imports nearly two-fifths of the cars it sells in America from north and south of the border, as does Stellantis. If Mr Trump also levies tariffs on imports from the that would worsen the pain. Although two-thirds of the cars sells in America are manufactured there, the rest are imported from the , according to Berenberg, a bank.All this points to a painful period of readjustment for Europe’s carmakers that will need to start with tackling overcapacity at home. Efforts to do so, however, are already encountering resistance. ’s unions are not the only ones taking industrial action. Last month Italian auto workers staged a one-day walkout, their first national strike in 20 years. Strikes have also hit auto suppliers in France and have been threatened at two tyre plants set to close by 2026.Politicians, too, are taking a dim view of factory closures. “Possible wrong management decisions from the past must not be at the expense of employees,” Olaf Scholz, Germany’s beleaguered chancellor, has said in relation to ’s planned closures. Carlos Tavares, the boss of Stellantis, has been chastised by the Italian government for sending jobs to low-cost countries. But unless European car companies can deal with rising costs and sliding sales their plight will only worsen. The warning lights are flashing more urgently now.
