The trials and tribulations of European carmakers are unlikely to end anytime soon, as the industry prepares for the latest crisis: high energy costs.
Europe’s auto manufacturing industry has barely picked itself up from a crippling semiconductor shortage during the pandemic. But a new threat is already rearing its head, with soaring energy prices threatening to cripple car production on the continent.
Europe’s mounting energy crisis—sparked by Russia clamping down on gas flows earlier this year—is already affecting a number of manufacturing industries that rely on energy-intensive processes, including glass and steelmaking. Now, a global auto industry forecaster is saying that the energy crisis could curtail new car production by the millions.
Auto manufacturing output could drop by over 1 million units a quarter starting from the last quarter of this year and continuing throughout 2023, according to a new report released Tuesday by S&P Global Mobility.
The report found that initial industry forecasts put auto manufacturing output at between 4 million and 4.5 million new vehicles in each quarter of 2023. But high utility bills, and the possibility of governments mandating companies to reduce electricity usage in the event of energy rationing, could bring that number down to 2.75 million cars quarterly, a nearly 40% drop.
“If you look through the supply chain—particularly where there’s any metallic structure forming through pressing, welding, or extrusion—there’s a tremendous amount of energy involved,” Edwin Pope, a principal analyst at S&P Global Mobility, wrote in the report.
“Total energy usage in these companies could be up to one and a half times what we’re seeing in vehicle assembly today. Anecdotally, we’re hearing that some of this manufacturing capacity is becoming so uneconomic that companies are simply shutting up shop,” Pope said.
Europe’s embattled auto industry
European carmakers just can’t seem to catch a break.
In 2020, passenger car production in the European Union fell by over 23% from before the pandemic, according to figures from the European Automobile Manufacturers’ Association (ACEA).
The drop was largely due to supply-chain issues and a shortage of semiconductor chips essential to auto manufacturing, issues that persisted in 2021 when production fell by a further 7.7%, according to the ACEA.
The chip shortage is still very much an issue in 2022—and, according to German carmaker Volkswagen, could last until 2024 at least—but automakers are adjusting to the crisis, with European governments announcing plans to invest more in domestic production over the coming years. In a forecast from February of this year, the ACEA projected that the European car market would start recovering in 2022, with new sales jumping nearly 8% above 2021 levels.
Another crisis
But that was before Russia invaded Ukraine and sparked the continent’s energy crisis, which is already forcing automakers to change their plans.
High energy costs have become an “additional element of chaos,” Carlos Tavares, CEO of Netherlands-based multinational auto manufacturing company Stellantis, said in September. Tavares added that Stellantis is evaluating how to reduce its energy usage, or even how to generate its own electricity through solar panel arrays to keep costs down without sacrificing output.
The rise in energy costs has been “alarming,” the Society of Motor Manufacturers and Traders (SMMT), a British industry group, said in August, warning that high prices were threatening vehicle production recovery in the U.K. The SMMT called high energy costs the “single biggest concern” for British carmakers at the end of September, with many already seeing rising production costs for raw materials.
The situation is likely to get worse this winter, when energy demand peaks and utility bills could rise by as much as 2 trillion euros across the continent. If energy supply were to become dangerously limited, European governments could implement energy rationing measures, forcibly cutting back on industrial activity.
In the U.K., new vehicle production is still nearly 46% below pre-pandemic levels, according to the SMMT, while in the EU, the ACEA predicts car sales in 2022 will still be 26% below 2019 levels. If European governments resort to energy rationing measures, it would be the “basis” for a worst-case scenario for European automakers already dealing with limited supply, according to Tuesday’s S&P report.
“For an industry already struggling with low inventories of vehicles in dealer showrooms, an additional crisis could be incapacitating on a global scale,” the report said.
