Stellantis, the automaker cobbled together from various global brands, made less money in the first quarter of 2024. Suppliers are mad at it. Whole countries are kinda mad at it. The company has squeezed and squeezed in order to prepare itself for a product onslaught that should mark the next big leap in the company. But what if those products aren’t popular? Then what happens?
I have no idea what will transpire because I do not have a time machine, a crystal ball, or any other way of predicting the future. If I did I probably wouldn’t have paid for MLB TV this year. But I’ve been doing this for a little while and I think I understand what Stellantis is trying to do; I’m just not sure it’s going to work.
Mercedes-Benz is another automaker that saw a drop in Q1, though I’m a little less worried about Mercedes and its product lineup. Penske Automotive also saw its revenues drop like Georgina. What’s going on?
All of this news would make you think April was a terrible month but, adjusted for seasonality, the market was close to that magic 16 million number. What gives?
The Bear Case For Stellantis
Few people in April of 2019 would have predicted that we’d all be Clorox-wiping tins of Pringles just a year later.
It was, however, great timing for Stellantis. The automaker came to being as a merger of FCA (itself a merger of Fiat’s brands and Chrysler’s brands) and PSA (itself a merger of Peugeot, Citroën, DS, and Opel). Rationalizing and combining all of these brands, products, and markets wasn’t something that was going to be easy.
The company’s leadership, under the guidance of Carlos Tavares (pictured), had a plan for it. You can see this plan clearly here in the United States where the former-FCA brands have stretched their product portfolios as long as possible. Seriously, the Dodge Challenger had more farewell tours than Elton John.
This worked well for Stellantis, and the pandemic didn’t hurt, as dwindling supplies meant buyers were desperate to buy anything and willing to pay above-market prices for what were often old platforms. Stellantis therefore made huge profits.
Now that inventory is back up for its competitors, Stellantis has seen its sales slide in Europe and the United States. The company seems to constantly be bickering with the Italian government. Suppliers have been squeezed so hard they’re threatening to strike. Stellantis has also laid off white collar workers and engineers in the United States.
Shareholders are questioning whether Tavares should get a big pay boost under the circumstances.
All of this may seem wild but it makes sense if you play engine-builder board games. These strategy games aren’t about building literal engines (usually), but about making a series of strategic decisions early in a game based on your position that will only pay off much later.
One of the engine-builders I love is Race for the Galaxy, which is card-based game that sees you trying to colonize some far-off galaxy. Do you take the diplomatic strategy? Is it an industrial play? Maybe military? It’s often not clear who will win until the last turn of cards, as small permutations in chance and the play of others finally come together to reveal who made the right moves earlier in the game. Thankfully, this game usually takes less than an hour. The last game of Viticulture I played took almost three hours before culminating (I lost).
What Tavares and crew are doing is similar, and the strategy is extremely sound. Harvest credits (profits) early, build your engine (or motors, in this case), and then be ready in the last round to win all of the points.
It’s why this quarter’s drop in Q1 net revenues of 12% year-over-year shouldn’t be that big of a deal. It’s all part of the plan. The company’s CFO, Natalie Knight, basically says so in its earnings release:
“While Q1 2024 year-over-year shipments and Net revenues comparisons were difficult due to transitions in our next generation product portfolio manufactured on new platforms, we are delivering clear improvements in key commercial dynamics with customer sales outpacing shipments. We are reducing inventories to reinforce our strong relative pricing ahead of our new or mid-cycle product launches this year in key regions. During Q1 2024, we have introduced four new models out of our full-year launch plan of 25 models, including 18 BEV nameplates, which we believe sets the stage for materially improved growth and profitability in the second half of the year.”
This is all extremely sensible, though it does raise an important question: What if the products suck? I get that the Dodge Hornet is sort of a mid-cycle bandaid to get something to dealers. Perhaps it’s unfair to judge on this one product launch, but I’m looking at what Stellantis is planning to do and I’m not 100% convinced it’ll work, at least here in North America.
Is the Jeep Recon going to be so great that it’ll stand up against the Scout, Cybertruck, and Rivian? Will the EV/Six combo of the 2025 Dodge Charger move the Mopar faithful? I think the new electric Fiat 500 looks great and I’m hopeful it’ll find a market, but it’s a little expensive at $34k for what you get, especially when you consider the Volvo EX30 costs about the same.
If there’s one brand I’m a little more bullish on its Ram, which has the 1500 RHO, the new regular 1500, the RAM REV, and the new Ramcharger. That’s a good portfolio, though RAM is still missing a competitor to either the Maverick or Ranger/Colorado/Tacoma.
In Europe, it’s also a little mixed. Will the Alfa Junior be a hit? Can the company find more customers for the Peugeot 408? The company is truly global, so two markets aren’t the whole game, but the company has been soft across the board. Sales were down 20% in North America, 6% in Europe, and 46% in China/India/Asia Pacific.
I’m not saying or hoping that Stellantis will fail to deliver on its new products. As a car enthusiast, I want them all to be awesome cars and trucks that we can all enjoy. I’m just pointing out what I think is obvious, which is that the company is making a huge bet on its product delivering in a big way over the next 12 months and, outside of RAM, I’m not convinced there are a ton of huge winners.
It would be nice to be wrong about this.
Mercedes Earnings Dropped 30% In Q1 2024
Mercedes-Benz saw a big drop in earnings before interest and taxes (29.8%) and also blamed a product changeover, though the company also has decent cash as it has managed to keep things tight.
From the company’s release:
Mercedes-Benz Group AG (ticker symbol: MBG) reported Free Cash Flow from the industrial business at a solid €2.23 billion (Q1 2023: €2.16 billion) in the first quarter with strong cash conversion including positive working capital developments. Group Earnings Before Interest and Taxes (EBIT) totalled €3.9 billion (Q1 2023: €5.5 billion), reflecting lower raw material prices, tight cost control and a strong performance at Mercedes-Benz Vans. These effects partially offset lower sales at Mercedes-Benz Cars where supplier bottlenecks and model changeovers in the Top-End segment also led to a less favourable model mix. Group revenue came in at €35.9 billion (Q1 2023: €37.5 billion).
Lower revenue is pretty much always bad, but Mercedes is making it clear it won’t get dragged into an EV price war. I don’t love the current crop of Mercedes EVs, as I think BMW offers better in almost every class, but the vehicles still remain popular globally.
Penske Automotive Net Income Drops 28%
Penske Automotive is one of America’s largest dealers and also has a transportation business, neither of which excelled in Q1.
Per Automotive News:
Penske Automotive said its retail automotive service and parts revenue grew 9 percent to a quarterly record of $746 million. Excluding agency sales, same-store gross profit per new vehicle retailed fell 18 percent to $5,195, and same-store gross profit per used vehicle slipped 0.1 percent to $1,833.
Though Penske’s offerings skew more premium, price pressure and interest rates are tough on everyone. But it wasn’t the dealerships that were the big problem. From Penske’s release, it sounds like it was Penske Transportation Solutions:
Lower equity earnings from PTS were primarily due to lower commercial rental utilization, lower consumer rental revenue, higher interest rates and average debt balances, and lower gains from the sale of revenue earning vehicles partially offset by improved operating results in full-service leasing and distribution center management when compared to the same period in 2023.
This isn’t that unexpected given there was a huge, clearly unsustainable expansion in trucking supply over the last couple of years. If only there was a push-to-pass button for business…
SAAR 16 Million!
For the third time, the seasonally adjusted annual rate (SAAR) likely hit 16 million vehicles in April, which is pretty good.
From S&P Global Mobility:
S&P Global Mobility projects new light vehicle sales volume in April 2024 to reach 1.34 million units. While this unadjusted volume total would be a drop from both the month prior (down 7%) and year-ago (down 2%) levels, two fewer selling days than March 2024 and one less than April 2023 more than account for any potential declines. This volume would translate to an estimated sales pace of 16.0 million units (seasonally adjusted annual rate: SAAR), just the third time in the past 24 months the metric has reached this level.
“With an auto sales environment currently defined by the mixed signals of advancing inventory and incentives, together with affordability concerns from high interest rates and still-high vehicle prices, the anticipated April result reflects that consumers are still in the market for a new vehicle,” said Chris Hopson, principal analyst at S&P Global Mobility.
Someone is selling cars! There’s a market out there and brands with attractive and competitive affordable cars and hybrids are doing well.
What I’m Listening To While Writing TMD
David and I don’t always listen to the same music, but Elton John is one of those artists we both enjoy. This whole album is great.
The Big Question
I’m wrong, right? Tell me I’m wrong. Tell me the Stellantis product that’s going to get everyone excited.
The post I’m Not Convinced Stellantis Can Stick The Landing appeared first on The Autopian.
