New car registrations in May were robust in Europe’s top markets, growing by a combined +17% y/y to 780,000 units and marking the tenth consecutive month of sales growth. Breaking down results by country, we find that Italy led the pack (+23%) ahead of Germany (+19%), the UK (+17%), France (+15%) and Spain (+8%). Rising car registrations primarily reflect a recovery in car production after more than two years marked by massive disruption caused by semiconductor shortages. However, the situation has hardly normalised: 2023 year-to-date registrations are still -26% below their 2019 levels (Exhibit 1). Durably depressed automotive production is felt very differently along the supply chain: While carmakers and top automotive suppliers managed to preserve their profitability, thanks to a more profitable product mix and higher prices, this has not been the case for smaller suppliers reliant on volumes.
Exhibit 1: Car registrations in top European markets (%)
While we anticipate registrations to continue edging higher by the end of the year, we believe 2019 levels are nowhere in sight and the European market is in for durably lower activity levels:
- On the demand side, the cost-of-living crisis combined with higher interest rates and the general increase in new car prices have driven a significant share of potential customers out of the market. The purchase of personal vehicles is the largest single item out of the durable goods aggregate in Europe (50%), and a significant contributor to the wider household consumption aggregate (4%).
- On the supply side, carmakers have been particularly successful at coping with lower demand by focusing production on their most profitable models and passing broad price increases onto customers. With order-books equivalent to more than seven months’ worth of production but new orders returning to their long-term average, carmakers are looking to keep production to an optimum of high-margin vehicles and low inventory levels (Exhibit 2).
Factoring in a continuous but careful recovery in production and a tougher comparison basis in the second half of the year, we anticipate car registrations in Europe’s top five markets to bounce back by +8% in 2023.
Exhibit 2: Duration of production assured by current order-book levels (months)
Hectic competition for electric vehicles
Meanwhile, the share of battery-electric vehicles (BEVs) will continue to grow and could reach 15% of all passenger-car sales as dominant carmakers race to launch new models and BEV specialists respond by aggressively cutting prices. As outlined in our recent report, the shift to electric vehicles in Europe is an unprecedented export opportunity for the Chinese automotive industry, which boasts the largest and most integrated electric vehicle ecosystem in the world. Year-to-date registrations in Europe show the trend is consolidating, with three made-in-China BEVs among the category’s best-selling models and the share of Chinese imports climbing to an estimated 3-4% of all car registrations, compared to virtually zero a few years ago. The rising competitiveness of Chinese carmakers is best reflected in Europe’s bilateral car trade with China, whose surplus has considerably shrunk on the back of booming imports (Exhibit 3).
Exhibit 3: EU automotive trade balance with China (EUR million)
Chinese competition will shake up a market that has significantly consolidated in recent years
The commercial ramp-up of BYD, “the Tesla of China”, will no doubt further shake up Europe’s car industry. Using registration data for the European market, we compute market shares over time to track changes in three of the most-used proxies for industry concentration: the CR3, CR5 and Herfindahl-Hirschman Index (Exhibit 4). We observe that the top three carmakers (CR3) have gone up from 45% to 53% of all passenger-car registrations between 2015 and 2023, and the top five carmakers (CR5) from 59% to 69%, while the Herfindahl-Hirschman Index climbed from 1,090 to 1,306 (a +20% increase).
Exhibit 4: Concentration ratios and Herfindahl-Hirschman Index (HHI) in Europe’s passenger-car market
The consolidation of the car industry has gathered pace over the last decade, including a larger merger of French and Italian car manufacturers. Consolidation has also been the outcome of competition, with smaller brands seeing their share falling further and top brands increasing their leads. Higher concentration has been instrumental in improving industry profitability, allowing carmakers to spread their fixed costs over a greater number of models, built using a reduced number of platforms, in factories whose capacity-utilisation rates have improved, thanks to the elimination of underperforming sites. It has also improved industry discipline and most likely facilitated the general increase in prices observed since the second half of 2021.
Could M&As help European carmakers fend off Chinese competition?
Achieving strong volumes of BEVs will be crucial for the profitability of European carmakers. Because China boasts both a wider domestic market and a higher penetration of BEVs, the country sells three times as many BEVs as Europe, giving domestic manufacturers a significant scale advantage over their foreign competitors. While accelerated consolidation among carmakers present in Europe would help them to scale up faster, we find the possibility of a new wave of M&As in the European market unlikely:
- First, the market shares of dominant European carmakers are so high that any deal involving two European firms would trigger close antitrust scrutiny. Rather than considering the entire European market, European authorities would most likely narrow down their analysis to what they call “relevant markets” that include a geographic dimension. Because most cars are purchased within the buyer’s country of residence, market shares would be computed at national levels, where they are considerably higher than the European average. For example, in France, the CR3 stands at 68%, the CR5 at 80% and the HHI at 1,906.
- Second, competitive foreign automotive groups operating in Europe have considerable scale globally and would be very unlikely to divest from Europe. At the same time, smaller players have little to offer since they mostly operate with an asset-light business model in Europe, relying on exports from other regions.
Carmakers will have to find efficiencies elsewhere
In the face of a very mature market and rising Chinese competition, carmakers will have to use different options to maintain their profitability:
- Driving smaller players out of the European market. We believe the additional competitive pressure from Chinese players could be the last straw for foreign brands with limited volumes that are also late in the BEV race. Excluding Chinese players, groups with a market share inferior to 2% have a combined market share of around 6%.
- Developing new horizontal and vertical partnerships to pool resources into cash-consuming activities, especially electric-battery manufacturing. Joining forces would help carmakers increase scale in critical activities with a lower likelihood of antitrust scrutiny.
- Consolidating production further around a reduced number of platforms and factories. Because BEVs use considerably simpler powertrains, they are faster to assemble and require less labour – a 40% difference compared to internal combustion engine (ICE) vehicles, according to Ford’s CEO Jim Farley. Carmakers could consequently reach similar production volumes while operating a reduced number of production lines and employing less workers. Combined with the planned decline of ICE technologies, this adaptation to the economics of BEV manufacturing could reshape the geography of European automotive production at local, national and regional levels.
Aurélien Duthoit
Aurélien joined Euler Hermes in 2019 as a Senior sector advisor for the retail, technology and household equipment sectors. Prior to joining the company, Aurélien held various operational and management positions at Xerfi, France’s leading sector research company. He then worked as a cross-sector risk analyst for Société Générale.
