Published on September 20, 2024
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Carmaker Stellantis is showing signs of weakness after a period of booming profits since the lockdowns.
The chart below shows this increase, including a record of more than $20 billion in net income for 2023. In contrast, over the 12 months to mid-2024, profit falls to $14 billion.
As you can see below, the stock is down about half since the problems first appeared in the first quarter.
Stellantis is facing a stumbling block due to excess inventories, particularly in the United States. The difficulties in clearing inventories are raising doubts about the group’s strategy and margins in the future. Indeed, the group’s performance since the reopening comes from sales volumes without discounts and increases in purchase prices. Due to a lack of purchases, the group has been reducing the rate of production at its factories since last year. The restart therefore requires more spending on production and discounts for clearing inventories.
The changing market trend – a consumer downturn and price cuts from competitors – is calling into question Stellantis’ prospects, particularly in the United States.
The president of the Stellantis dealer association in the country even explains in a statement to the CEO, Carlos Tavares:
“It’s time to get production back up and running and start selling in a way that will allow us to achieve a more respectable market share. We need to get workers, dealers, and suppliers back to work – building and selling cars that Americans want to buy, at prices they can afford. Let’s get rid of existing inventory quickly, and get the factories working again. This will hurt Stellantis right now, but it always does after mistakes of this magnitude.”
Moparinsiders reported in May:
“In the wake of the pandemic, carmakers have been charging high sales prices for vehicles, with few discounts. Since then, the market has taken a turn… Now Stellantis is struggling to clear its inventory of cars, which it could have sold without problems before. The result? Many Stellantis cars are sitting at dealerships, with no buyers.”
As the car inventory chart shows, in the US, manufacturers are compensating for factory shutdowns during lockdowns. Inventories have been climbing since the reopening, to 231,781 in July, up from 74,250 in February 2022.
Price increases and tighter access to credit are putting a strain on purchasing power. As for Stellantis’s competition, it is now selling at greater discounts.
The site continues:
“Stellantis cars now wait an average of 100 days at dealerships, twice the industry average of 50 days. Among the company’s problems are higher-than-standard selling prices, typically more than $30,000 a unit. Stellantis has only one car [la Jeep] for sale for less than $30,000 in North America.”
After the sales euphoria during the reopening, Stellantis now faces a risk of losses for the year – in cash flow – due to the lack of profits and investment needs.
The chart below, from the mid-2024 shareholder presentation, shows the decline in sales compared to last year. They go from €98.4 billion to €85 billion over the period. As you can see, the problem comes from a €11.4 billion drop in volumes. The average price of cars increases a little over the period.
The table below, also taken from the shareholder presentation, provides an overview of cash flows.
Indeed, the gross profit on operations, after construction and marketing costs, reached 8 billion euros compared to almost 14 billion over the same period in 2023. On the other hand, due to the need for investments and provisions for cash flow – caused by the drop in revenue – the cash flow (free cash flow) turns negative at -392 million, compared to a surplus of more than 8 billion euros over the same period in 2023.
The chart below shows the source of the disappointment: weaker sales in North America. In contrast, sales in Europe and the rest of the world show little change from 2023. However, in terms of car numbers, sales reach 791,000 units in North America by mid-2024, compared to 939,000 at this time in 2023. Moreover, the market share for the region falls from 10% to 8.2% in one year. Stellantis is therefore losing ground to the competition.
According to an analyst at Seeking Alpha, a stock market site, the concerns stem from consumers running out of steam:
“Stellantis has managed to generate high profits, taking full advantage of the most profitable year for automakers since the pandemic, with a high selling price strategy in North America, and positioning brands like Jeep as luxury products.
Although the strategy delivered results in terms of revenue, two side effects emerged that sowed the seeds of the poor results in mid-2024: 1) a decline in market share, 2) excess inventories.
On the presentation of the results to shareholders, CEO Tavares promises a reaction to the problem. In particular, he announces the introduction of more models.
He explains:
“We are suffering from the convergence of several negative factors… in a transition period, which is pushing us towards the introduction of a product blitz with 20 new models. We will resolve these transition difficulties, and ensure that we get back on track…”
Among the causes of the difficulties, Mr. Tavares cites the pricing strategy. He explains that “some of our marketing tactics, particularly in the United States, have not borne fruit.”
On the other hand, the strategy of introducing more models also creates more investment needs. According to the CEO, the renewal of the range is part of the reasons for the loss in cash flow:
“On the product side… we have 20 new models, which is a significant blitz in terms of launches, and that explains some of the cash requirements that you see in the cash flow. We have spent a lot on the future, not only on our products but also on technology, which is going to help transform our business.”
Directors Departures
In addition, as a sign of loss of confidence in the group’s strategy, branch managers in North America have resigned, adding to staff layoffs aimed at cost savings on operations.
According to Teslarati, in June:
“Following the departures of four senior executives at Stellantis in North America, some dealers are concerned about the company’s future.
Recent departures include Jim Morrison, head of Jeep North America, who retired this month; Dodge Ram CEO Tim Kuniskis, a 32-year veteran of the company, also retired in May; Jason Stoicevich, who just left after just two months as vice president of U.S. consumer sales, and Richard Schwarzwald stepped down as chief customer officer, citing personal reasons.
Quoted by Automotive News, a former director of the Stellantis dealer association for the United States explains:
“What concerns me is that people who know how to sell cars in the United States are leaving. I’m not trying to belittle the people who are replacing them. But we’ve lost very, very skilled people who are capable of doing the things that are necessary for the success of the company. It’s concerning that they’re deciding to leave.”
He adds:
“Not only are they forcing talented and experienced people out, but others with enormous talent and experience are making that choice. This begs the question: why is that?”
In short, Stellantis’ reversal of fortune shows the problem of lack of buyers. Production, with insufficient demand, leads to losses and waste.
Danger of production without buyers
Stellantis’ troubles in the US show the danger of manufacturing without regard to price signals and the reality of demand. Sales and margins show the value creation of a business. However, politicians continually push companies to more waste and failure through directives or incentives that are unrelated to demand.
The former director of the European Central Bank, Mario Draghi, has also published a report on the causes of the slowdown in growth in the zone.
It calls into question the standards and regulations on the continent:
“The problem is not that Europe lacks ideas or ambition. We have many talented researchers and entrepreneurs filing patents. But innovation is blocked at the next stage: we fail to translate innovation into commercialisation, and innovative companies that want to develop in Europe are hampered at every stage by inconsistent and restrictive regulations.”
On the other hand, he still believes in the creation of incentives, guarantees and investment funds under the control of politicians.
The Conversation sums up the situation as follows:
“The report also calls for strengthening the role of public development banks in implementing a new European industrial policy. It highlights in particular the role of the European Investment Bank and national development banks (National Promotional Banks in the text), to implement an ambitious new industrial policy on a European scale.
Value creation, in cars, technology or energy, comes from the effort of producers in response to a market demand – individuals. Increases in activity in a sector, due to public distribution of money or thanks to political directives, actually lead to wasted money, with no improvement for consumers in the end.
As Stellantis’s troubles show, value creation comes from responding to the wants and needs of individuals. Producing goods without market demand actually leads to wealth destruction.
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