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European carmakers struggle with weak US, China demand

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Potential tariff war adds to sector's concerns

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Stellantis ( STLA ) shars drop nearly 11%

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Aston Martin shares plunge 20% after profit warning

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Volkswagen cut 2024 profit outlook for second time in 3

months

By Nick Carey

LONDON, Sept 30 (Reuters) - European carmaker Stellantis ( STLA )

joined on Monday bigger rival Volkswagen

and others in warning about the worsening outlook for auto

demand and rising costs, wiping billions of euros off the

sector's market value.

The automakers are struggling with weak demand in China and

the United States and a potential trade war between Beijing and

the EU as the bloc prepares to finalise import tariffs on

Chinese electric vehicles over alleged subsidies.

British luxury carmaker Aston Martin also issued a

full-year profit warning on Monday, partly blaming falling

demand in China, as Mercedes-Benz and BMW

also did earlier this month.

Aston Martin's shares plunged as much as 20% to their lowest

in nearly two years.

Shares in Stellantis ( STLA ) were down nearly 11%, hitting their

lowest since December 2022 as investors digested the scale of

the world No. 4 automaker's problems. Stellantis ( STLA ) shares have

lost 38% in value this year, making it Europe's worst performing

automaker.

The latest warnings follow Volkswagen's announcement late on

Friday that it was cutting its 2024 profit outlook for the

second time in under three months. Its shares were down a little

over 2.8% in mid-morning trading on Monday.

The German car giants have been reliant on China for around

a third of their sales and have been hit by a weaker economy

there and fiercer competition from domestic Chinese automakers

and a vicious EV price war.

MISJUDGING US CASH COW

Falling European demand has not helped either. New car sales

in the European Union fell 18.3% in August to their lowest in

three years with double-digit losses in major markets Germany,

France and Italy and sliding electric vehicle sales.

Much of Stellantis' ( STLA ) problems, however, stem from North

America.

The expensive Jeeps and pickup trucks that Stellantis ( STLA ) sells

in the lucrative U.S. market have generated virtually all of its

profits since the automaker was formed out of the merger of FCA

and PSA in 2021 and have made its profit margins the envy of its

mainstream peers.

But high inventories and weak sales as Stellantis ( STLA ) has

somehow misjudged its cash cow market has forced it to both cut

production while also offering deep discounts on the vehicles

depreciating on dealer lots across America.

As a consequence Stellantis ( STLA ) has slashed its adjusted profit

margin for the year to between 5.5% to 7%, down from double

digit and warn of negative cash flow of between 5 billion euros

($5.6 billion) and 10 billion euros.

Forward 12-month price-earnings ratios, a measure of a

company's market value, for the three biggest European carmakers

- VW, Stellantis ( STLA ) and Renault, are around 3, much lower

than U.S. rivals, GM and Ford, and Toyota ( TM )

- the world's largest carmaker.

Where traditional European automakers' problems intersect is

rising competition from Chinese rivals who can develop better,

cheaper EVs much faster than Volkswagen, Stellantis ( STLA ) or Renault

can.

They are also struggling to sell the EVs they are making,

while investing large sums to develop new, more affordable

models.

Changing over production lines to new models takes

revenue-generating capacity offline, exacerbating cash flow

issues for legacy automakers whose plants already have capacity

utilization problems that they have failed to address.

Falling market share in China and lower car demand in Europe

have led Volkswagen to warn of possible plant closures in

Germany, putting the company on a collision course with the

powerful IG Metall union.

Talks over pay between Volkswagen and the union started last

week.

($1 = 0.8948 euros)

(Reporting By Nick Carey; Editing by Emelia Sithole-Matarise)