UBS analysts have issued a warning to Europe's automakers, stating that they are facing threats from China competition. As a result, shares of Renault SA and Volkswagen AG have been downgraded to sell from neutral. Renault's share price dropped by 3.8% to €35, while Volkswagen saw a decrease of nearly 3%, leaving shares at €109.70.
Renault in particular has been hit hard, with its share price being slashed from €42 to €31. According to a team of analysts led by David Lesne, this downgrade comes as Renault's financial performance reaches its peak while competition from China steadily ramps up.
While the analysts expect Renault's financial performance to remain strong in the near future, they note that most indicators are no longer showing signs of improvement. They also state that traditional mass manufacturers are at a higher risk of losing market share due to increased competition from Chinese original equipment manufacturers (OEMs) and Tesla.
With 70% of Renault's unit sales dependent on Europe and the company holding a 10% market share, the analysts believe that Renault is one of the most vulnerable players in this situation. They also express doubt that Renault's planned initial public offering of its EV and software unit, Ampere, will have a significant impact on the company's value for shareholders.
Adding to the challenges faced by the auto sector, Tesla has recently reduced prices of its Model S and Model X cars in China for the second time in two weeks. This move highlights the increased competition faced by Tesla in the Chinese market. Tesla's shares, which experienced a 3.4% decrease in August, fell by 0.7% prior to Friday's Wall Street opening.
In conclusion, Europe's automakers need to brace themselves for intensifying competition from China. The warnings issued by UBS analysts serve as a reminder that even established manufacturers like Renault and Volkswagen are not immune to these challenges. As prices continue to drop and competition increases, it remains to be seen how the industry will adapt and respond to this changing landscape.
Volkswagen's Exposure to Chinese Carmakers
According to UBS analysts, Volkswagen is the original equipment manufacturer (OEM) that is most negatively impacted by the rise of Chinese carmakers on a global scale. Previously the top OEM in China, Volkswagen now faces the risk of marginalization. As the leading automaker in Europe, it is also likely to be significantly affected by the highly competitive Chinese electric vehicles (EVs) in the long run.
UBS initially held a positive view of Volkswagen. However, the company lost its first-mover advantage in the EV market due to underperformance in key areas. As a result, Volkswagen's battery, software, and Scout EV unit are estimated to generate €15 billion in losses and require €30 billion in cash investment from 2023 to 2027. Furthermore, UBS analysts, led by Patrick Hummel, expressed concerns about the execution risk associated with Volkswagen's partnership with Chinese EV manufacturer Xpeng.
Compared to Volkswagen, Chinese EV maker BYD is anticipated to have a 25% structural cost advantage even with local assembly. Additionally, the European market is experiencing oversupply, compounding the challenges faced by Volkswagen. Consequently, UBS downgraded Volkswagen shares from €135 to €100.
Effects on Rival Automakers and Markets
The downward trend in the automotive industry has affected Porsche Automobil Holding and BMW as well. Both companies witnessed a 1.5% and 1.7% drop in their shares, respectively. This trend also impacted the German DAX index, which decreased by 0.1%. However, other European markets saw modest gains, with the Stoxx Europe 600 index increasing by 0.2%.
In contrast, the FTSE 100 index experienced a 0.3% increase. Mining shares received a boost as China's August Caixin manufacturing purchasing managers' index (PMI) surpassed expectations, reaching 51 and indicating improving conditions. Additionally, China reduced the down-payment requirements for homes, further stimulating the market. Consequently, China-sensitive mining companies like Rio Tinto PLC and Anglo American witnessed share increases of 1.2% and 0.9% respectively.