Carmakers drive efficiency hopes into a ditch

Rapid reverse. Carmakers are catching up with economic reality. Both Nissan and Stellantis shares fell around 7% on Thursday after weak results, adding to recent gloom from rivals like Tesla and Ford. A tough market erodes the high margins enjoyed by the European group and hinders its Japanese peer’s turnaround. Any recovery could drag on.

Auto groups are facing multiple headwinds. After years of raising prices due to pandemic-driven supply constraints, they now have to contend with higher rates, weaker consumer demand, a costly transition to electric powertrains, and rising competition from Chinese rivals. They must either cut prices or sell fewer cars. Automakers’ incentives per vehicle rose from $2,048 in June 2023 to $3,129 last month in the United States, according to Autodata.

Stellantis, the European group, shipped some 10% fewer cars in the first half compared with a year earlier. Its operating profit fell by around 40%, and it just reached its target of a “double-digit” margin. After factoring in capitalised research costs, Jefferies reckons its margin was less than 9%. The slump is a blot on Stellantis’ stellar reputation for efficiency, deriving both from CEO Carlos Tavares’ cost-cutting skills, and its profitable U.S. division.

Meanwhile, Nissan’s 99% year-on-year drop in operating profit for the quarter ending in June and the decision to revise down its full-year earnings forecast will undermine the fragile confidence in its turnaround, and shares fell by as much as 11% in intraday trade. That had seemed to be gathering steam last year when its operating profit hit 569 billion yen, similar to 2017, before allegations of former Chairman Carlos Ghosn’s misconduct threw the company into disarray.

Nissan reckons there are better days just round the corner: the company is reducing production and launching fresh models later this year, which it hopes will drive U.S. inventory down by as much as a fifth between the first and third quarter.

Stellantis is still promising a “double-digit” margin this year, implying at least some stability. Tavares is pledging to regain market share and cut costs. A “blitz” of fresh launches, like the affordable Citroen C3 electric car, may help.

However, investors will struggle to keep faith, given that the headwinds are gathering speed. Nomura forecasts that U.S. industry inventories will rise to over 3 million vehicles by the year end. That implies renewed pressure on prices, or future production cuts. And consumers’ appetite for jazzy new models may wane if central banks don’t cut rates quickly. The troubles are not in carmakers’ rear view mirrors quite yet.

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Stellantis reported weaker-than-expected results for the first half of 2024, amid weak pricing and falling volumes in North America. Revenue fell 14% to 85 billion euros from the same period in 2023, while operating income stood at 8.46 billion euros, down 48%, equivalent to a margin of 10%. Stellantis reiterated its guidance for a “double-digit” operating margin for 2024. Nissan Motor reported a net profit of 29 billion yen ($190 million) for April to June, down 73% from a year earlier. Operating profit fell 99% to 1 billion yen over the same period, while revenue rose 2.8% to 3 trillion yen. The company also revised down its earnings forecasts for the full year, cutting estimated operating profit for 2024 to 500 billion yen, from 600 billion yen. However, it revised its sales forecast up to 14 trillion yen from 13.6 trillion yen.