Freezing point

In sync with the season temperatures, car’s energy gradually drops, and sales are, to say the least, strained

09:00 | 2 ноември 2022
Обновен: 10:07 | 2 ноември 2022
Снимка: Mauricio Palos/Bloomberg
Снимка: Mauricio Palos/Bloomberg

By Kaloyan Zhelev

Europe’s disposable income risks being destroyed by the huge rise in fuel prices – a circumstance that poses as big a threat to the car industry as the rising cost of electricity. And it portends an erosion in the sales of the previously untouchable battery electric cars as well.

Despite legitimately growing fears that energy shortages could cause Europe's lights to go out and factories to close, some industry analysts appear reluctant to adjust their sales forecasts for 2022 and 2023. And they also continue to like the outlook for manufacturers of premium cars whose consumers are relatively immune to the surge in energy prices.

LMC Automotive, for example, recently slightly raised its outlook for Western European car sales, revising its 2022 forecast to -6.2% (9.93 million cars) from its previous baseline of -6.4% and that of mid-summer from minus 7.4%. The dynamics contrasts with the Ukrainian war-ravaged growth forecast of 8.6% at the beginning of the year.

According to the September report by consultancy Cornwall Insight, the regulated by the government annual electricity bills for the average family in the UK could jump from just under £2000 to around £4400 by next April. Unregulated small businesses face much larger increases and fear mass corporate bankruptcies. At the same time, domestic gas prices in Europe are up to 10 times higher than the price paid by Americans.

With the explosion of both Nord Stream routes, the end of Turk Stream maintenance and the drastic drop in Russian natural gas supplies, the scenario is repeating itself for much of the continent. We have finally realized the obvious: that without decisive action, the incomes of much of Europe are doomed to decline. Double-digit inflation, unprecedented in decades, is eroding citizens' ability to buy even basic necessities. In such a context, the idea of buying a new car risks looking like a pipe dream.

Economic murder

European governments are desperately looking for ways to at least temporarily stave off this killer economic scenario. The investment analysts Evercore ISI are on the opinion that in the context of the Russian energy supply crisis, the economic outlook for the EU and Germany looks bleak: "Investors are closely associating negative natural gas prices/futures with higher probabilities of production disruptions in the EU in the fourth quarter of 2022 and the first of 2023. We now await policy responses: Britain is hoping for a big bailout and an energy price cap, France could use an unexpected energy tax, and Germany looks disoriented,” we read in a note to investors.

Despite acknowledging that inflation and rising electricity prices are a threat, LMC Automotive remains oddly optimistic: "The forecast for the full year 2022 remains at 9.9 million vehicles, which, based on July data, means we can expect an increase of sales in the remaining months of the year. Regional market activity will certainly be tempered by supply constraints. Meanwhile, demand is also a cause for concern as the cost of living increases due to rising inflation and a surge in energy prices," the agency's latest monthly report said.

But there are also much more worrying analyses. Germany's IFO Institute claims that the state of the country's automotive industry has deteriorated sharply: "The general darkening of the mood in the economy is also reflected in the automotive sector, with suppliers being much more pessimistic than manufacturers," explained IFO spokesman Oliver Falk.

According to the British Society of Motor Manufacturers and Traders, UK car sales rose with 4,6% in September – for the second time since February – but GlobalData motoring analyst David Leggett believes that with price inflation and interest rates rising, the kingdom is headed for an economic recession and new car sales are set to fall again later this year and into 2023.

From all directions

The problems go far beyond Albion's borders. In front of an economic conference organized in early October by the Italian newspaper Il Sole 24 Ore, we heard Renault’s chief executive officer Luca de Meo say: "Now the world is very afraid of a possible recession in the next few months and that will be our next challenge."

To the guests at the autumn reception of the European Automobile Manufacturers' Association (from French – Association des Constracteurs Europeens des Automobiles- ACEA) in early October, its President and CEO of BMW, Oliver Tsipse, gave a kind word that car manufacturers "remain a reliable partner and engine for an economically strong Europe that can assert itself globally".

A day later, an official statement by ACEA came out, in which European car manufacturers warned that they faced another year of sales decline and called on politicians to step up their support for the industry's post-pandemic recovery. In contrast to more optimistic analysts, ACEA expects EU passenger car sales to fall by around one percent to 9.6 million: "Compared to pre-pandemic figures for 2019, this represents a 26% drop in car sales only for three years," ACEA said in a statement. Despite the slight optimism, overall the forecasts sound very alarming, as the automotive world faces a serious recession that promises to shake to its foundations political suggestions for future climate neutrality, at least in the form in which Brussels envisioned them until the end of winter. What are they based on? The combination of record high fuel prices and negatives from the war in Ukraine are enough grounds for the dramatic forecast by S&P Global Mobility that from the fourth quarter of 2022 and throughout 2023, potential production losses from plants in Europe could exceed 1 million cars per quarter!

As seen from similar negative regional events in the past – e.g. shortages of Ukrainian neon hampering semiconductor supplies and the 2011 earthquake followed by a tsunami in Japan paralyzed the supply of microcontrollers, specific sensors and paint pigments – today supply chain disruptions are capable of bringing the automotive industry to a complete halt.

Forecasts for a wet and cold European winter combined with energy shortages could have a similar effect. Recent explosions in Russian underwater gas pipelines to Europe increase the risk and likelihood of forecasts predicting significant further supply chain disruptions from November to spring. This is related to expectations of disruption of the traditional "Just in time" model: some suppliers could implement a partial monthly 24/7 production schedule instead of the traditional weekly shifts because of its higher energy efficiency related to start-up and shutdown costs. This inevitable energy rationing creates conditions for pessimism.

For an industry already struggling with low vehicle inventories in showrooms, such an additional crisis could become a setback on a global scale. The reason is that European suppliers send modules and components to manufacturers all over the world and thus their influence extends to the entire industry – not just a region.

Edwin Pope, Principal Analyst, Materials and Lightweighting at S&P Global Mobility: “If you look across the supply chain – especially when you're working a metal structure formed by pressing, welding or extrusion – there's a huge amount of energy involved. The total energy consumption in such activities can be up to one and a half times that seen in the assembly of vehicles. Some of these production facilities become so uneconomic that companies simply close."

Before the energy crisis, gas and electricity costs were a relatively minor component of a car's material specification – typically under €50 per vehicle. With their prices skyrocketing, they now range from around €690 to over €770 per vehicle, with energy costs compounding the sector's already perilous position, given the impact that rising raw material prices have already had on nascent EVs value chains. The combination of the two erodes margins in a market where cost increases are not easily passed on to the end consumer, already facing energy and food inflation.

EU-wide energy constraints will force some countries to take urgent policies to counter this threat. Although OEMs have some tools to counter regional utilities, the pressure on the automotive supply chain will be strong, especially upstream. They have the potential to affect volumes, with the result that there is a risk that manufacturers will stop supplying cars due to shortages of individual components that are not necessarily related to energy policies.

Supplier’s destiny

Although the industry “dashboard” is littered with red signal lights, some producers are protecting their supplier base by monthly indexing of key commodities. However, this practice is not massively spread and as higher on the supply chain you move, the lesser the producer’s defense is. Smaller Tier 2 and Tier 3* companies in the supply chain probably do not have the resources or operational complexity implied by hedging tools, forward contracts and the like.

The situation that Europe faces can turn out to be only temporary – it really depends on the Russian-Ukrainian conflict development. However, a longer-term transformation of the energy picture can lead to industrial, structural consequences. This could cause production schedules and sourcing strategies to be rejected and redirected to areas where the burden of energy costs is least. While Europe is facing a winter of discontent today, more disruption could follow tomorrow.  This will lead to fundamental upheaval in the automotive sector in the region and beyond – a circumstance that directly affects us here in Bulgaria.

In the same way that labor costs have historically played a key factor in the location of manufacturing, the energy mix and self-sufficiency may become key elements of future supply decisions.


Automotive consumption is no doubt fond of pre-pandemic trading conditions, with component shortages forcing automakers to focus on the real cash generators in their model portfolios, and those by default are the higher-margin and higher-priced versions due to which made getting a new car not only more difficult due to the massive buyback clauses in current leases on both sides of the Atlantic, but also more expensive.

From geographical point of view, there is a clear contrast (we sense it in our country as well) between the traditionally developed market (USA, Canada, Western Europe, Japan, South Korea, Australia and New Zealand) and the developing ones. In the first group, they believe that the situation is much more difficult, in contrast to the second: mature markets are operating at roughly 3/4 of the levels of 2019, while in the developing ones, volumes, viewed in aggregate, are recovering. Helping to explain this sluggishness is the higher chip intensity of products for the mature market – that's where the more equipped, higher-end versions are simply sold.

There are also differences in the mix of propulsion systems, whose dependence on regional regulatory peculiarities forces car manufacturers not only to invest colossal sums in research and development, but also to run simultaneously in all directions, because if Europe for now still insists on its program “Fit for 55”, and the US adopted an unprecedented climate package, this is far from all regions of the world where – due to the vastly different levels of economic development and motorization – vehicles with conventional drive, which means that the investment flow to it will not stop.

The technological reorientation has forced automakers to move upstream and into the value-added, investing significant resources in historically alien activities such as lithium, cobalt, and rare earth mining to ensure the sustainable achievement of their ambitious emissions targets.

The technological reorientation has forced automakers to move upstream and into the value-added, investing significant resources in historically alien activities such as lithium, cobalt, and rare earth mining to ensure the sustainable achievement of their ambitious emissions targets.

All this naturally led to a fundamentally threatening mass nature of the car, a rise in the prices of the final product, the decline in demand for which is still partially masked by the long queues waiting for new cars.

Patience in the face of the constant growth of final prices is certainly subject to exhaustion, but we all somehow tend to forget that no one anywhere has promised us a cheap path to continental climate neutrality. Let's not forget that it is not one of the most pleasant in purely product terms: in the model portfolios of many mass producers (premium brands are not yet so affected, at the expense of their prices) the offer of drive systems is radicalized to the extent in which the possibilities are reduced either to disproportionately reduced conventional units with internal combustion, or to expensive electrification – a "choice" that promises only one thing: to erode even the growth of electric cars, which are constantly increasing in price. The reason is that their sales are directly dependent on government subsidies, and in the context of the looming recession and crisis cascade, the public resource for them will only become scarcer.

And so, in sync with the seasonal temperature forecasts, cars’ energy gradually drops and the horizon of expectations in this historical moment is, to say the least, intense.

In such an unhappy context and with the added Bulgarian cocktail of internal political instability and sustainable deficit of will and resources of any kind, the energy of cars here is traditionally weak. And it is yet to become weaker.

THE BOTTOM LINE European automotive manufacturers warned that they are facing another year of sales slump and urged politicians to step up support for the industry's post-pandemic recovery.


Tier 1 suppliers: The companies providing functionality (not just modules integrated into a function) to the vehicle. They usually work directly with manufacturers and are responsible for the development and integration of various systems and subsystems into their products.

Tier 2 providers: Manufacturers providing a complex system or subsystem that can be integrated with other systems and subsystems to provide vehicle functionality. They usually work directly with Tier 1 suppliers, except in high value-added cases.

Tier 3 providers: Manufacturers of components and small mechanisms subject to integration into a given system or subsystem. They usually work directly with Tier 2 suppliers, except in high value-added cases.