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As the quarterly earnings season unfolds, automakers are grappling with substantial profit declines, prompting many to revise their 2024 revenue forecasts. Companies including VW, Nissan, Audi, and Stellantis have all announced tens of thousands of job cuts globally in recent weeks. Yet, revenues for most automakers have risen year-on-year from 2023 to 2024. What is behind this apparent contradiction, and do EVs have a role in this shifting landscape?
Shrinking profits
The automotive sector’s performance is closely tied to revenues and profit margins, which are essential for strategic planning and budgeting. When examining net profit margins (total revenue divided by net income) for OEMs year-to-date against the same period in 2023, a consistent downward trend emerges.
What is driving this trend?
A primary pressure facing automakers is the high cost of labour, a VW spokes person was quoted saying “We urgently need a reduction in labour costs in order to maintain our competitiveness”. In addition to this, many consumers are feeling the pinch of high inflation consequently opting for cheaper options. This in turn puts pressure on the OEMs to keep vehicles as lower prices, reducing profitability.
For many automakers, ICE vehicles remain the primary profit generators. Additionally, EVs for most non-Chinese OEMs typically have much slimmer profit margins or are sold at a loss. Furthermore, for legacy automakers, revenue streams from maintenance services and spare parts sales, historically significant contributors, are diminishing as EV sales grow. The relatively lower need for maintenance in EVs reduces these once-lucrative income sources.
READ: VW plans plant closures and mass layoffs, what role do EVs have to play in this?
The role of China
China, the world’s largest automotive market, remains critical for global OEMs. Taking VW as an example, one in three of its vehicles sold is purchased in China. However, the rapid evolution of the Chinese market has left many legacy automakers struggling to adapt.
Most non-Chinese OEM sales in the region continue to rely on ICE vehicles. Yet, as China’s market transitions towards electrification, demand for ICE models is waning. Domestic automakers, who now dominate the EV market, are reaching price parity with ICE vehicles, leaving foreign OEMs playing catch-up.
Additionally, luxury-focused players such as Mercedes-Benz are facing headwinds in China as its economy weakens. Slower economic growth is dampening demand for high-end goods, further pressuring revenues and profit margins.
READ: Energy Transition Capital Monthly – October 2024
The cost of electrification
The transition to electrification is expensive for many automakers. Developing new EV platforms or modifying existing ICE platforms entails significant capital expenditure. Similarly, the conversion or construction of EV production facilities requires heavy investment.
Compounding this, EV production plants often have lower throughput compared to ICE manufacturing facilities of similar scale, and EV assembly times are typically longer. These factors collectively inflate production costs.
For instance, Ford’s EV division reported a USD1.2 billion loss in the latest period, selling just 23,500 EVs. This equates to a loss exceeding USD50,000 per vehicle sold, illustrating the profit challenges associated with EVs.
The outlook
China’s automotive market has undergone a dramatic shift, with domestic players achieving EV price parity and dominating sales. Although the global transition to electrification is inevitable, the current macroeconomic environment suggests that profit margins will remain under pressure. Rising costs, intensified competition, and the challenges of adapting to a new technological paradigm will likely continue to erode earnings for many automakers in the near term.
More Information
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