The French automotive sector, led by companies like Renault and Stellantis, faces significant challenges, including reduced pricing power, rising vehicle costs, and intense competition from Chinese manufacturers. The shift towards producing more affordable cars is straining profit margins, while trade war threats and the costly transition to electric vehicles add to market pressures. Despite Stellantis issuing a profit warning, Renault is maintaining its targets, suggesting a potential recovery, although forecasts for its profits have been revised downward.
Challenges Facing the French Automotive Sector
The French automotive industry, particularly giants like Renault and Stellantis, has been navigating turbulent waters in the stock market recently. As Vincent Marioni, head of credit investments at Allianz Global Investors, points out, the pricing power that manufacturers enjoyed in the post-Covid era has considerably diminished. This decline, compounded by the financial burdens of restructuring—such as factory closures—poses a significant threat to profit margins.
In an environment where many households are grappling with ongoing purchasing power challenges, the soaring prices of vehicles have become a major concern for consumers. As a result, car manufacturers are increasingly shifting their focus towards producing more affordable vehicles, which yield lower profit margins. This shift undeniably impacts the profitability and cash flow for manufacturers. While cost-cutting measures are being implemented, they fall short of countering the prevailing market challenges, according to Marioni.
Market Pressures: Trade Wars and Rising Competition
The French automotive sector faces a multitude of headwinds, including the looming threat of trade wars and the rise of competition from Chinese manufacturers. The transition to electric vehicles, mandated by environmental regulations, presents a costly challenge for manufacturers who have made significant investments while many consumers remain hesitant to transition from traditional combustion engines to electric models, often perceived as expensive. Marioni highlights the competitive pressure from Chinese manufacturers who are rapidly gaining market share with aggressive pricing strategies. Moreover, recent comments from Donald Trump about potential trade wars could further jeopardize the position of European car manufacturers.
Stellantis, in particular, has raised concerns among its shareholders after issuing a profit warning at the end of September. Research firm AlphaValue has flagged difficulties faced by the Franco-Italian-American manufacturer in the U.S. market, as inventory reduction strategies have negatively impacted performance. Although Stellantis is actively cutting down on inventory, AlphaValue is awaiting the complete annual accounts for 2024 to better assess the effects of discounts on profitability. Meanwhile, broker Bernstein is holding off on purchasing Stellantis stock, as it is considered close to its estimated fair value.
On the other hand, Renault seems to be holding its ground in the stock market, being the only European car manufacturer to have reaffirmed its targets for 2024. This resilience has caught the attention of AlphaValue, which suggests that Renault may be on the path to reclaiming its reputation as a “quality company.” The manufacturer has seen improvements in its situation over recent years, with a strengthened balance sheet and promising new model launches anticipated for 2025. However, broker Jefferies has lowered its profit and dividend forecasts for Renault, leading to a downward revision of its price target on the stock.
Readers of Momentum were alerted early on about the potential for significant declines in the stock market for both Stellantis and Renault.