Listed autos have yet to adjust

After its 2024 suffering in share price terms as well as business trends (see the analysis of European 2024 registrations), one would be surprised to discover that over 5 years the sector defended its turf well. It is a bumpier performance but not at a significant opportunity cost to its owners. To date.  

 

European Autos are in effect driven by Brussels. This is not new news but made more salient by auto manufacturers’ joint inability to meet tight regulations in 2025. They face the perspective of very heavy fines for failing to abide by the calendar for lower emissions. 

AlphaValue used to say that car manufacturers are banks with a car manufacturing unit attached. That is doubly true by now as the sector is, like Banks, totally strangled by regulation. The emissions related ones may be the worse as they promise to break the camel’s back. Cars are a unique industry in that it has to listen to a fickle consumer while abiding to enormously complex environmental objectives. In short green is a liability that weighs on the sector valuation multiples. 

The environmental mess adds to the digital conundrum. As a piece of software with wheels attached, modern tin boxes plunged into the ugly reality of consumer electronics: fast depreciating kit. As a product sold on finance, fast depreciation is a residuals killer which means that either the user takes the risk of keeping the hot potato or it does not but at a greater financing cost. In this last instance, the manufacturer ends up requiring a formidable balance sheet to face fast rising risks of being turned into the managers of a ginat second hand fleet.

Today an EV does not sell without a subsidy (mostly gone in European) and does not sell without acceptable finance which is unlikely to survive the collapse in value of cars quickly out of fashion. In addition most consumers are confused by the diversity of models and powertrains so will avoid to take a risk and stick to ICEs as long as possible 

Final nail in that industry coffin, car manufacturers’ attempts to squeeze further the hapless consumer with subscriptions to access driving functionalities as well as collecting data at their expense reeks of despair about unenviable business models are likely to go nowhere. 

The above sector performance chart shows that the excesses of 2022-2023 (rip off margins) are essentially behind. The mess unfolding in business models has yet to percolate in valuations. It is the same issue whether one is looking at European or Chinese car manufacturers. 

One explanation for the hitherto resilience could be that European brands have value. It is probably a pro- domo stance. It does stand in the face of the obvious gains made by others. From the 80’s, Japanese car manufacturers have quickly replaced European and US brands in South East Asia and Africa. Not to mention their gains in western markets! Brands have value only if the product is consistently better. With the enormous Chinese competition looming, it is nearly impossible for European players to stay on top. They have all the issues related to being legacy players: to be weighed down by existing operations and not being innovative quickly enough. On top over the last 10 years, Tesla has proven that a new brand can emerge from nowhere and change the game. So we do not believe in brands as a valuation mechanism. 

In short the Autos sector has plenty of potential for a nasty southward adjustment. Oxygen by back-pedalling on the green agenda (whether provided by Trump or Ms von der Leyen) can only be that, a short term breather. 

Much much more is needed that would involve European governments and the formidable industrial hinterland that the European car industry represents. One may not exclude that the industry deglobalizes, balkanizes and halves in size towards a mobility business model less obsessed by world competitiveness and more concerned by long term stakeholder impacts. It would need to start with the closing down of borders to anything ‘not made here’. It would continue with massive upstream subsidies to grow new digital based mobility concepts with a green agenda and data protection at the fore. 

This will not happen. It looks wise to exit now.