You can see something that the headlines frequently overlook when you stroll through the parking lot outside the Ford plant in Cologne. neatly arranged rows of completed cars, ready for purchasers. Employees arriving late for a shift meeting. In other words, the factories continue to operate. However, the stocks of these factories are trading as though the next ten years have already been lost by Europe’s auto industry. There’s a problem.
When you line it up, the math is startling. With free cash flow yields that would embarrass the majority of the S&P 500, Mercedes, BMW, Stellantis, Renault, and Volkswagen all trade at mid-single-digit earnings multiples. The European auto industry appears to be seen by investors as a melting ice cube. Some of them might be correct. However, the discount has grown so large that it now accounts for nearly all negative outcomes at once: the energy transition eating up margins, American tariffs biting hard, German exports collapsing in Shanghai, and Chinese EVs eating share. simultaneously. All indefinitely.
Admittedly, the geopolitical environment is chaotic. In order for an electric vehicle to be eligible for subsidies, 70% of its parts must come from within the EU, according to “Made in EU” regulations that the EU is getting ready to introduce. Protectionism is what France desires. Germany, whose automakers sell over 25% of their cars in China, is secretly afraid of reprisals. Local content requirements carry “the risk of backlash from other countries,” according to Karoline Kampermann of the VDA.” The procedure, according to one European lobbyist, is “walking on eggshells.” In the meantime, Washington has launched new Section 301 investigations into excess capacity in the EU, China, Japan, and India, specifically focusing on the auto industry. Trump’s threat of a 50% tariff from the previous summer is still lingering like stubborn cigarette smoke.
And yet. Volkswagen’s ID.3 already sources 86% of its parts by value from within the EU, according to A2MAC1, a French company that physically disassembles rival cars to measure content. When you take out the battery cells, which practically everyone in the world still purchases from China, Renault’s Renault 5 comes in at 76%. These businesses are not going to be shut out of their own domestic market. These are businesses that have been re-shoring covertly, slowly, imperfectly, and sincerely for years.
Insiders in the European industry believe that the market has combined two distinct issues into a single pessimistic narrative. Indeed, there is and most likely always will be competition from China. Yes, German brands’ margins have shrunk in China. However, once subsidies begin to flow toward local production, the domestic European market—the factories in Wolfsburg, Stuttgart, Flins, and Mirafiori—remains highly consolidated, cash-generating, and surprisingly defendable. Value is transferred to these companies under a subsidy regime that supports EU content. It’s not included in the price.
Big Oil in 2020 is the cultural parallel that keeps coming to mind. The majors were dying, as everyone had concluded. They used single-digit multiples for trading. Then the group printed money, capital discipline took effect, and oil continued to exist. Observing the development of European cars has a somewhat similar feel to it—not exactly the same, but rhyming. It’s difficult to ignore how frequently the most despised industries wind up being the most important.
To be fair, the risks are real. Christophe Perillat, CEO of Valeo, recently issued a warning: “There will be massive relocations if we don’t do this. I have never witnessed an industry disappear and then reappear. That is a strong statement. European suppliers may hollow out more quickly than anyone anticipates if Brussels mishandles the Industrial Accelerator Act, either by going too soft on local content or too hard and inciting tariff retaliation from China. Furthermore, the entire idea would be undermined if a Chinese automaker established plants in Turkey in order to gain access to EU subsidies.
Even so, a portfolio manager who looks at these names now gets paid handsomely to wait. yields on dividends over 5%. balance sheets that withstood an energy crisis, 2008, and 2020. China has not been able to match this level of brand equity at the premium end. There is a geopolitical discount, but it’s debatable if it’s justified.
