European Automakers’ Margins Stressed by Tariffs, Chinese Competition—Fitch

European Automakers’ Margins Stressed by Tariffs, Chinese Competition—Fitch

European automakers’ profitability will decline in 2025 due to tariff-related disruptions and challenging conditions in China, Fitch Ratings says. The electric vehicle (EV) transition will accelerate in 2025 and 2026, diluting profit margins. Most investment-grade manufacturers have sufficient rating headroom to absorb these pressures, supported by strong capital structures.

Fitch expects the US tariff announcements to have negative implications for automotive production and sales, prompting automakers to rapidly restructure their manufacturing footprints and optimise fixed costs.

Increasing raw material prices and cost pressures from suppliers will further intensify profitability challenges. This is in addition to Fitch’s existing expectation of a low-single-digit decline in sales in Europe.

Tariffs pose a significant risk for automakers exporting vehicles manufactured at facilities in Japan, Korea and Germany to the US.

For Volkswagen, the tariffs will affect the higher-margin luxury segment, including the Porsche and Audi brands, further weakening free cash flow (FCF) and constraining rating headroom.

Mercedes-Benz faces similar risks, as the company uses its US manufacturing base as a hub for its global sport utility vehicle production, which could be affected by potential tariff hikes from the Chinese government.

“We expect that the impact of tariff increases will be shared between suppliers and automakers, with automakers bearing the greater portion of the burden.” Tariff uncertainties may cause fluctuations in production, adversely affecting the cash flows of suppliers who rely on automakers.

The recently announced EU-US trade agreement is broadly in line with our expectations, although full details are not yet known and it is subject to approval by EU member states. European automotive production remains 15%-20% below pre-pandemic levels and is likely to stay subdued over the medium term, reflecting a slower-than-anticipated transition to EVs, intensifying overseas competition, and evolving consumer preferences.

Companies such as Volkswagen and Stellantis have been rationalising their European operations through plant closures and workforce reductions. We expect these restructuring measures to weigh on short-term cash generation, with estimated one-off restructuring costs equivalent to about 1% of median FCF.

German automakers and premium manufacturers have continued to cede market share in China to domestic competitors and have faced heightened pricing pressures, including in the premium segment, which has traditionally shown greater resilience to cyclical fluctuations.

European manufacturers are seeking to stabilise market share losses by forming partnerships with local companies with expertise in autonomous driving and software development.

However, we do not anticipate a material change in the competitive landscape in China over the medium term.

Fitch Ratings expect European automakers to increase battery EV sales in 2025, following a stagnant 2024. This growth will be driven by the introduction of new models and market share gains from non-EU manufacturers.

However, medium-term competition is likely to be fierce, with Chinese manufacturers building their own networks and increasing sales in the market. As a result of these pressures, profitability and FCF generation declined in 2024, and we expect further reductions in 2025 due to reduced production levels, restructuring, and challenging market conditions in China.

This has led to negative outlooks and negative rating actions in the sector. However, the balance sheets of most investment-grade issuers are likely to remain robust, as reflected in their net cash positions. MTN Nigeria Exceeds N10tn in Post-Earnings Vibes, Public Offer Looms