Stellantis Faces Turbulence in North America, Dragging Down Auto Stocks

Stellantis, the automotive giant behind brands like Dodge, Ram, and Jeep, has issued a stark warning about its North American operations, sending its stock tumbling and impacting other major automakers. The company's strategic changes, including production cuts and increased incentives, have raised concerns about the broader state of the industry.

Navigating Challenges in a Shifting Automotive Landscape

Stellantis' North American Woes

Stellantis has announced that it will need to "enlarge remediation actions" due to performance issues in North America and a "deterioration" in the global market, particularly in China. The company plans to reduce North American shipments by more than 200,000 vehicles in the second half of 2024, up from a previous guidance of 100,000 vehicles. Additionally, Stellantis will increase incentives on 2024 and older model year vehicles, and implement productivity improvement initiatives that encompass both cost and capacity adjustments.These strategic changes have led Stellantis to revise its adjusted operating income margin for the fiscal year 2024, now expecting it to be between 5.5% and 7%, down from its previous "double digits" forecast. The company also anticipates a loss of 5 billion euros to 10 billion euros in industrial free cash flow, a significant drop from its previous "positive" outlook.

Ripple Effects Across the Auto Industry

The challenges faced by Stellantis have had a ripple effect on the broader automotive industry. Shares of other major automakers, such as General Motors, Ford, and Toyota, also slipped on Monday in sympathy with Stellantis' announcement.The deterioration in Stellantis' North American business has been no secret, with inventories swelling, price cuts expanding, and dealers voicing concerns about the company's management. Additionally, the United Auto Workers (UAW) is considering labor strikes, believing that Stellantis has violated its agreements to restart operations at its shuttered Belvidere, Illinois, assembly plant.

Industry-Wide Challenges

Stellantis is not the only automaker facing structural and macroeconomic issues. German giant Volkswagen is planning to lay off workers in Germany due to overcapacity and downbeat sales, with workers planning to strike in retaliation. Meanwhile, Japan's Nissan is cutting production of its Rogue SUV and Frontier pickup due to rising inventories, with global sales dropping over 5% in August. Nissan's product mix in the US, lacking hybrids, is also hurting its sales performance.Last week, Morgan Stanley's autos and mobility team, led by analyst Adam Jonas, downgraded the entire US auto sector, citing rising inventories and concerns from China as the main catalysts. The team noted that US inventories are on an upward slope, with vehicle affordability still out of reach for many households, and credit losses and delinquencies continuing to trend upward for less-than-prime consumers. Additionally, they highlighted that China's long-standing growth engine has not stalled, further contributing to the industry's challenges.

Tesla's Resilience and Robotaxi Ambitions

Interestingly, amid the broader industry turmoil, Morgan Stanley maintains its Overweight rating on Tesla, citing the company's AI and self-driving prowess. Tesla's highly anticipated robotaxi event is slated for next week, on October 10th, which could potentially offer a glimpse into the company's vision for the future of transportation.As the automotive industry navigates these turbulent times, Stellantis' struggles in North America have become a bellwether for the broader challenges facing the sector. The ripple effects across the industry, coupled with the ongoing structural and macroeconomic issues, underscore the need for automakers to adapt and innovate to stay competitive in an evolving market.