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European carmakers struggle with weak U.S., China demand

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Potential tariff war adds to sector's concerns

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Stellantis ( STLA ) shares drop nearly 11%

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Aston Martin shares plunge 20% after profit warning

(Updates stock action in paragraphs 4 and 5, analyst comments

on Stellantis' ( STLA ) U.S. approach in paragraphs 15 and 16)

By Nick Carey

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

on Monday joined 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 companies are struggling with weak demand in China and

the United States and a potential trade war between Beijing and

the European Union as the EU prepares to finalise import tariffs

on Chinese electric vehicles, imposed over alleged subsidies.

British luxury carmaker Aston Martin also partly

blamed falling demand in China for a full-year profit warning on

Monday, as did Mercedes-Benz and BMW earlier

this month.

Aston Martin's shares plunged as much as 28% to their lowest

in nearly two years.

Shares in Stellantis ( STLA ), long popular with investors but now

seen as acting too slowly to address problems in the U.S.

market, fell nearly 15% and hit their lowest since December

2022. 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 the weaker economy

there, fiercer competition from domestic Chinese automakers and

a vicious price war in the electric vehicles (EV) market.

"MANAGEMENT'S CONSPICUOUS ABSENCE"

Falling European demand has not helped. New car sales in the

EU fell 18.3% in August to their lowest in three years with

double-digit losses in major markets Germany, France and Italy

and sliding EV sales.

But many of Stellantis' ( STLA ) problems stem from North America.

The expensive Jeeps and pickup trucks it sells in the U.S.

market have generated virtually all its profits since the

automaker was formed by the 2021 merger of FCA and PSA, 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 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% and 7%, down from double

digits, and warned of negative cash flow of between 5 billion

euros ($5.6 billion) and 10 billion euros.

In a client note after Stellantis' ( STLA ) investor relations team

held a conference call with investors, Bernstein analysts wrote

that the company had been slow to address concerns over the size

of its U.S. inventories.

"Today's cut ... signals a drastic about-face," they wrote.

That lack of speed, "management's conspicuous absence during

today's call" and concerns over pricing discipline "will require

a significant effort to rebuild trust going forward."

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 the

world's largest carmaker, Toyota ( TM ).

Where traditional European automakers' problems intersect is

rising competition from Chinese rivals who can develop better,

cheaper EVs 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)