In the United States, we currently have two things that are holding our automotive market aloft: trucks and small crossover-sport utilities. In Europe, there are two things holding the automotive market up: robust export pathways and a fast-growth electric vehicle market.
In the U.S., we are seeing pickup trucks and large sport utilities, the mainstay of income for the Detroit-based makes, see sales begin to slow down. Not heavily, yet, but it’s there. These vehicles are usually beholden to gasoline pump prices, so any volatility in the world’s oil distribution networks will mean higher prices and thus less demand for trucks and truck-based models. The non-Detroit brands selling in the U.S. generally see their primary profits coming from small crossover-SUVs. These two- and sometimes three-row models are family mainstays, doing the work of yesteryear’s minivans and station wagons.
In Europe, exports have been a large part of automakers’ success strategy, with European brands being exported (usually as luxury models) to major markets like the U.S. and China. At the same time, due largely to government incentivization, Europe has seen a vast transformation of its market moving into electric vehicles. But both of these mainstays of the European automotive climate are starting to fail.
Three big things are causing Europe’s problems.
The first is a slackening of the world market towards European imports, especially in the luxury and supercar markets. This loss of interest in high-cost European imports is mainly due to economics with competition helping to drive home those economic realities. The luxury vehicle market on the whole is seeing a shift as buyers begin cross-shopping highly feature-rich alternatives without the luxury marques. For most automakers, this just means consumers are moving from their luxury up-brands down to their mainstream brands. The money is still being spent. But for European brands selling luxury outside of Europe in key markets like the U.S. and China, that means consumers are leaving the brands for somebody else’s car. That’s a loss.
The second issue are the limits of the European governments’ ability to provide infrastructure for all of the EV adoption. Because of the European Union’s insistence on growing only “green” electrical power production, the costs and lengths of time for infrastructure expansion are high and long. This means the European grids have not kept up with the fast-paced EV adoption. And so EV buyers are facing higher and higher charging costs and less and less usefulness from their vehicles.
This leads to the third issue, Chinese imports. Mostly electric vehicles. Which are fast replacing the domestically-branded electrics that inevitably cost more to buy. European brands like Mercedes, BMW, and Volkswagen are losing share to Chinese imports. And fast. Despite fairly high tariffs adding to those imports’ costs. Because of the infrastructure problem, the EV market expansion in Europe might have slowed significantly. Except it hasn’t. Instead, it’s exploding. Why?
I’ll give you three guesses, but they all have to be “government incentives and mandates.” The EU is outright banning combustion engines in some places and heavily restricting emissions (especially CO2). It’s also incentivizing electric vehicle purchases to the point that buying a comparable gasoline or diesel vehicle is akin to the difference in purchasing a base model or a luxury option.
The EVs win out because government wants them to. Yes, that’s a very American way to look at it, I know. I’m an American with not even a modicum of deference to the Old World. The “dreamy old days” for me were my childhood, not the Victorian Era.
Meanwhile, by contrast, both the American and Chinese markets are seeing a fast slow-down in EV adoption. Because both governments have stopped direct incentivization for domestic purchase of an EV. For differing reasons, of course, but the result is the same.
All three of these things have led European automakers to a potentially very steep cliff. Right now, European production is at about 60 percent of capacity. Healthy manufacturing targets are about or above 80 percent to be profitable. A factory that is effectively idling 40 percent of the time is losing a lot of money in upkeep and other costs.
At some point, European manufacturers will have to start closing down facilities. Also a very expensive proposition because workers, factory floors, tools, and buildings don’t just stop existing at a moment’s notice. It costs a lot of money to save money. That’s the biggest downside to manufacturing, no matter the product. Heck, it’s true in the rest of economics as well, most of the time. Terry Pratchett’s Sam Vimes summed that up pretty well.
So the European automotive manufacturing industry is facing a huge crossroads. It can keep attempting to exist as it currently does and inevitably fail or it can spend a huge amount of money and effort redesigning itself to become more competitive with the low-cost options that are cutting its market share globally.
We’ll see which way this goes. My colleague Larry Printz is fairly optimistic for them. Me? I think it’s more likely that brands like BMW and Mercedes will go the way of Volvo. A wholly-owned subsidiary of a company owned by a government. VW will probably be OK, though. It’s not rooted so heavily in luxury exports and has managed to reverse-brand itself out of the whole Dieselgate thing.
This article originally published on the AaronOnAutos Substack.
