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European automakers are enjoying healthy profits today. But the mass-market carmakers are under threat from upstart competitors as the sector transitions to electric vehicles. Joining forces might soften the blow, but it is hard to see how a collision can be avoided entirely.
Renault boss Luca De Meo has floated the idea of a collective European response to EVs, inspired by Airbus. Exactly what shape an “Airbus of autos” might take is unclear, but it is an intriguing concept. Stellantis, Volkswagen and Renault are reportedly at least open to the idea of working with competitors.
It isn’t hard to see why EU carmakers might be keen on collaboration of some description. The transition to EVs may be slower than hoped — which is good news for near-term cash flows — but it is unstoppable. Incumbents are ill-equipped to compete with new entrants such as Tesla and BYD.
The problem is that they have already lost more than half the battle — literally. New EV players sold more than 50 per cent of all EVs purchased globally in 2023. That scale contributes to a significant cost advantage. For vehicles in the same segment, Chinese cars cost 20 per cent to 30 per cent less to make, reckons Patrick Schaufuss at McKinsey. That makes it hard for carmakers to ramp up their own production to profitable levels, especially for mass-market vehicles.
There are a lot of carmakers seeking a slice of the EV pie. About 2mn EVs a year are sold in Europe, a figure that might reach perhaps 9-10mn by 2030. The number of cars that each production line needs to sell to be profitable might be around 300,000-400,000 per year. European carmakers are set to launch 35 EV models in 2024 alone, according to Daniel Roeska at Bernstein.
Hence the appeal of pooling research and development costs. Volkswagen alone is set to invest €120bn between 2023 and 2027 on batteries, software and the like. Platform sharing — already an industry practice — might also help them gain scale.
In theory, joining forces could mean integrated supply chains and optimised operations. In the best case, European carmakers could close perhaps two-thirds of the cost differential with their Chinese rivals, thinks McKinsey. That is probably impossible in practise, and still leaves a structural gap.
Europe is hardly fleet-footed when it comes to organising cross-border collaboration, particularly when it inevitably involves job losses. The reality is that the gargantuan task of getting this Airbus off the ground would only take EU carmakers so far. The path to competing with new entrants will remain an uphill one.
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