In-depth Analysis

Car makers remain under pressure as Ukraine conflict dents consumer confidence

The conflict in Ukraine could end up being for the car industry what Covid was for the airline industry – a blow from which it will take a long time to recover.

Covid had done damage to the car industry even before the war started in Ukraine, with supply chain disruptions and production headaches caused by microchip shortages. Car sales in Europe have been declining steadily for the last eight months as Covid restricted movement, school attendance, office work and foreign travel.

Decline started as Covid restrictions eased

Worryingly for the car makers the decline started accelerating this year even as Covid restrictions began easing across Europe and reached a record high in February. Car registrations in the EU and UK dropped by 5.4% in February, following on a 2.4% drop in January.

Car maker Stellantis saw sales drop by 18%, with Peugeot sales declining 24%, Alfa Romeo 23%, Fiat 22% and Citroen 19%. Volkswagen fared a little bit better with an overall decline of 12% across all of its brands except for Porsche.

The conflict in Ukraine has complicated the situation on several levels. For most European countries, particularly those physically closest to Ukraine, the war is acutely felt as 3.5 million displaced people are on the move and looking for shelter. Poland, the Czech Republic, Slovakia, Austria, Germany and Switzerland are already struggling with the inflow of Ukrainian refugees.

Ebbing consumer confidence

Add to this geopolitical uncertainty, a shock rise in electricity and petrol prices and the result is a sharp decline in consumer confidence like the one in April 2020 at the start of the Covid pandemic and the first lockdown. This week Belgium reported that its domestic consumer confidence index declined from 1 to -16. In Denmark consumer confidence has dropped to the lowest since 2008 and the all-important German consumer confidence index fell to -8.1 for March. Consumer confidence is a key signal for future household consumption and a sharp drop directly translates into a decline in big-ticket sales such as property and cars.

In addition to several global manufacturers have stopped deliveries to Russia including Groupe Renault, Volkswagen and Jaguar Land Rover while at the same time losing access to supply of car parts that used to be produced in the Ukraine.

Markets have already counted some of this into the car makers’ share prices but with the conflict potentially dragging on for many more months further declines are likely.

Volkswagen shares have lost over 17% in the last month, Stellantis is trading down 14.55% on the month, Renault has dropped 27.54% since February and BMW 13.57%. Auxiliary industries have also been affected such as German car part maker Continental AG and French tyre maker Michelin.

But within the car industry one area seems to be immune to what is going on in Europe. Volkswagen’s sales of its luxury brand Porsche have actually increased even as sales of all other brands have declined, and at luxury car maker DS Automobiles sales have increased by 13%. Maybe a luxury car is the new safe haven buy?

 

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