European inventories are still weak

Recently, European OEMs have been forced to trim build significantly, while incoming orders have slowed. How has this affected inventories?

While inventory figures are not publicly available in Europe, recent events have highlighted that stock movements are a critical component when it comes to understanding the likely evolution of production volumes.

Following the Lehman Brothers collapse in 2008, OEMs were immediately faced with crashing market volumes. They responded by slashing output to minimise unplanned or unrequired stocks. But the scale of the crisis was such that this response proved to be too slow, leaving European OEMs sitting on circa one million Light Vehicles by the close of 2008, all of which were stuck in the supply chain and surplus to requirements. Of course, such shocks are not uncommon. Following the German reunification boom, the European market crashed in 1993. More recently, with the outbreak of the COVID-19 pandemic and the ensuing lockdowns, European OEMs saw days’ supply rocket to over 115 days in the first quarter of 2020. An ideal level for European days’ supply is around 60 days, meaning that the region was overstocked by 55 days!

European OEMs have been forced to trim build significantly, while incoming orders have slowed as both have been impacted by the chip shortage. While the impact of chip shortages has improved in recent months, full normalisation of semiconductor supply is not anticipated to be achieved during this year. In addition, China’s recent change in approach to managing COVID-19 is set to cause a rapid spike in local supply-side disruption, with knock-on effects feeding through to wider automotive supply chains.

But there is some good news – European inventories have essentially been flat since the start of last year, in contrast with the destocking of -1.2m cars suffered during the first in 2021 (itself worse than that suffered under Lehman Brothers). Indeed, we saw a recovery in Q4 of 2021, but at +320k units this was still far from an exceptional performance.

Our outlook for this year is what can be described as a ‘fragile recovery.’

So, unlike the Lehman Brothers-induced recession of 2008/9, the sector is in a much healthier position to respond to the market if supply difficulties ease. Much, therefore, rests on how the war in Ukraine and COVID-19 restrictions in China unfold.