2024 has proven to be a challenging year for auto manufacturers and suppliers. After a strong post-pandemic rebound, the tide has turned as pent-up demand has been tapped out and supply has piled up,weighing on automakers’ pricing power. The three largest car markets – China, Europe and the US – have all seen softening demand. Globally, Brazil and Mexico were the only large markets with double-digit growth in the first half of the year. Average selling prices have fallen notably across major markets, leading to a deterioration in profitability for key automakers. The picture is also bleak for auto suppliers as their margins are being squeezed amid dropping demand and increasing investment costs due to the EV transition.
Competition has intensified as the rise of Chinese EVs remains a significant challenge to legacy carmakers. Despite their shrinking margins and decelerating demand for EVs, legacy carmakers cannot afford to miss out on the sector’s structural changes, even though the transition is likely to be bumpy in the near future. At the moment, most are still struggling to produce affordable EV models profitably, while Chinese EVs keep gaining traction with their massive cost advantages and proven quality. This has prompted carmakers to continue investing in less profitable EV models or to seek other potential options such as hybrids as they navigate the challenging environment, putting further pressure on their profitability.
Additionally, we think political uncertainty is the main variable in the sector’s trajectory going forward. The carrots and sticks imposed by the public sector have played a key role in driving EV adoption and developing EV infrastructure, from China’s massive subsidies to the US’s industrial policies to the EU’s ambitious goals.
Trade measures are heating up as the US raised tariffs on Chinese EVs to 100%, and the EU followed suit with a more moderate scope. While the US’s move is more symbolic, in our view, despite the significant number, the stakes are higher for Europe due to its stronger trade ties with China in the auto sector. Increasing retaliation from China is expected if tensions esclate, which could backfire on Europe’s own companies. Nevertheless, we also anticipate increasing investments by Chinese carmakers in Europe to circumvent the tariffs.
The reshuffling also brings opportunities to emerging markets despite their smaller market size. Brazil and Thailand are experiencing rapid growth as governments roll out supportive green policies, and Mexico is seeing surging investment inflows, becoming one of the biggest beneficiaries of elevated geopolitical tensions between the West and China.
