Volkswagen’s plant closure will not be Europe’s last

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European auto investors are accustomed to bumpy rides. The sector is known for its tendency to chase volume, at the expense of margins, and periodically end up on the skids. In this light, news that Volkswagen is pondering the closure of the Audi plant in Brussels is comforting. Expect others to be forced to follow in its tail lights.

VW’s move is somewhat of a rarity. It would mark the German carmaker’s first-ever plant closure in Europe. Ford’s Saarlouis plant in Germany is also on the way out, and the UK is, of course, no stranger to car companies ceasing production. Yet, by and large, overcapacity in Europe has been managed by removing shifts and reducing output, rather than wholesale scrapping.

That is going to become increasingly difficult to do. European light vehicle sales, while cyclical, are well below their peak, which Bernstein puts at 22.4mn in 2007. That compares with a market of only 17.8mn in 2023, or a 4.6mn shortfall.

The problem is compounded by the fact that European automakers have been losing share, especially in electric vehicles which — between battery electric (BEV) and hybrids — accounted for almost 25 per cent of the market last year. About a quarter of BEVs are expected to be imported from China in 2024. Overall, that translates into capacity utilisation for European plants of about 80 per cent, says Patrick Schaufuss at McKinsey.

Battery vehicles made in China are taking share in Europe

The EU’s sanctions on imports of EVs from China are unlikely to help. Indeed, they may prompt manufacturers to open new production facilities in Europe. BYD on Monday agreed a $1bn deal to open an EV plant in Turkey, which will produce 150,000 vehicles a year. China’s largest carmaker had already announced plans for a plant in Hungary. Chery will open facilities in Spain while SAIC, maker of the MG, has flagged potential new European capacity investments.

The combination of sluggish demand and competition from new entrants bodes ill for capacity utilisation. Trying to fill plants by winning market share — while perhaps tempting for the likes of Stellantis, down 200 basis points in the past two years to 18.2 per cent — would hurt margins. These are already coming under pressure from rising costs and dilutive EV sales.

Fears that carmakers might embark on a renewed drive to regain volumes helps explain why the sector trades at a miserly 6 times earnings. Closing plants, while painful, may be a signal that the sector is instead grappling with the harsh realities of its predicament.

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