Eyes on the Wheel: Europe's Automotive Journey of Adaptation • Garbe Industrial Real Estate

The automotive industry is in the news almost every day as it needs to adapt to new innovations and a challenging economic environment.

At the same time, manufacturing, particularly automotive, was a key demand driver for Industrial & Logistics space in Germany last year. As automotive is important for the overall economy and real estate sector, it’s important to define the future direction of this sector and to remain focused with ‘our eyes on the wheel’.

Key learnings:

Pillar of the European economy: The automotive industry makes a significant contribution to overall GDP, employment, the manufacturing base, and innovation. Additionally, it has an important multiplier effect in the economy.
The industry is facing challenges and undergoing transformation: Driven by various factors such as a lag in adapting and investing into new technologies, increased global competition, and high energy prices.
Automotive logistics real estate demand is diverse: Demand is also driven by non-cyclical operations (e.g. tires) and emerging technologies like electric vehicles (EV).
EV is a game-changer: Despite recent EV-sales slowdown in Germany, long-term forecasts project strong growth across Europe. This transformation creates new demand from EV-manufactures, it’s suppliers and from associated industries like battery production.
Occupiers prioritize cost-effectiveness and emerging technologies drive incremental demand: Challenging market conditions prompt increased caution, yet further expansion driven by the EV industry is expected. Overarching trends such as geopolitics and supply chain de-risking play pivotal roles.

Automotive is a pillar of the European economy

Key statistics in Exhibit 1 illustrate the importance of the automotive industry for Europe. Additionally, the automotive industry has an important multiplier effect in the economy, benefiting upstream industries such as steel, chemicals, and textiles, as well as downstream industries such as ICT, repair, and mobility services.

Economic Pillar:

> 1 trillion €
contribution to EU GDP in 2022

~7 %
of EU GDP

Job Engine:

13,8 Million
jobs in auto industry

6,1 %
of total EU employment

Made in Europe:

~165 plants
for assembly and production

~102 billion €
trade surplus for EU

Driver of Innovation:

~60 billion €
annual spending on R&D

~30 %
of total EU R&D spending

Exhibit 1: Automotive’s Impact on the European Economy

Challenged economic conditions

As seen in Exhibit 2, confidence among automotive manufacturers deteriorated rapidly from its last peak in early 2022 and is currently – with the exception of the pandemic period – at one of the lowest levels since the Global Financial Crisis. Low confidence is fuelled by multiple reasons, including a weak global economic outlook, increasing competition (especially in the field of e-mobility from China), additional pressure from emission regulations, and relatively higher energy prices. There are some initial signs of an improved outlook for the German automotive sector. The latest report from the ifo institute indicates an improvement in the current business situation and an uptick in confidence in April 2024.

Note: seasonally adjusted, NACE level: Manufacture of motor vehicles, trailers and semi-trailers.

Automotive industry creates multiple layers of demand

Initially, it’s fair to conclude that the current economic turbulence limits logistics real estate expansion plans, with a focus solely on cost-effectiveness. However, demand from the automotive industry is diverse. Automotive logistics demand is fuelled not only by cyclical demand but also by non-cyclical demand, such as those from tire companies or spare parts. Additionally, there are emerging demand drivers, such as the sector’s leading role in innovation. In recent years, multiple new R&D facilities have been announced across Europe, which also entail logistics space needs. Overall, logistics real estate demand is transitioning from traditional automotive drivers to new emerging trends like EV.

Innovations can further increase the competitiveness of e-vehicles compared to combustion engines.

The emergence of EVs is a game-changer

The transformation towards EVs is affecting all aspects of the industry, including the associated supply chain and logistics real estate. According to the IEA, the share of EV car sales is expected to rise from 21 % in 2023 to 60 %, and total battery EV car sales are projected to more than triple to 6.8 million by 2030. Other analysts, such as UBS, HSBC, and Jefferies, forecast even higher sales levels by 2030. It’s clear that the outlook remains robust despite a recent slowdown in sales. To achieve scale in the next phase, a mass-market with attractive pricing is essential. Innovative manufacturing processes, like giga-casting or unboxing introduced by Tesla, could accelerate consumer EV adoption as these reduce production costs and, therefore, better compete with combustion engines.

Note: only forecast for 2025 and 2030 available. Europe covers EU-27, Norway, Iceland, Switzerland and United Kingdom.

The growth of electric cars comes from well-known car brands as well as emerging ones, such as BYD, which aims to increase its market share of EV car sales from 1.1 % in 2023 to 5 % by 2025. The operations of BYD serve as a good example of overall supply chain and logistics real estate trends. To mitigate supply chain disruption and the Red Sea turmoil, the company has just added a new 7,000-vehicle sea vessel to ship cars via Bremen to Europe. The planned production facility in Hungary, scheduled for 2026, is a good example of the nearshoring trend ‘in Europe, for Europe’.

Suppliers and their supply chains will also transform due to significantly lower levels of individual car parts (a rule of thumb is 1/3 compared to the traditional combustion engines), and the transformation increasingly demands semiconductors and batteries. This need is tied to the projected strong growth of battery production facilities in Europe, as seen in Exhibit 4, of which the automotive industry is a key purchaser.

‘It’s always darkest before the dawn’

It’s clear that the automotive industry is in a transformational stage and faces key challenges. However, this is not the first time for the European car maker industry. In the late 1970s and early 1980s, the rise of Japanese brands caused severe competition, but European brands adapted successfully over time. Analysts, including Commerzbank, believe the European car industry is adapting by focusing on their core business and efficiency. Europe was late, but the announced EV models are expected to compete with global competition, and for many larger European manufacturers, the peak of investments in electrification is likely to be reached next year. Analysts continue to monitor the smaller-medium-sized suppliers, as for some it’s more challenging to adapt, which could lead to further consolidation in the industry.

Wrapping up: summarizing implications for logistics

Automotive is important for logistics real estate, and demand from this sector is diverse, including final assembly and emerging technologies like EVs and spare parts. There are occupier strategies in place to face the increasing pressure on the cost basis, and therefore location (e.g. proximity to customers and suppliers) and building efficiency (e.g. energy costs) have grown in importance. As the sector transitions, we anticipate traditional demand drivers to decelerate, while emerging trends will accelerate demand, ultimately balancing total space requirements and complementing established hubs with emerging hotspots.

Occupiers prioritize supply chain stability due to rising geopolitical tensions, leading to an increased manufacturing focus ‘in Europe, for Europe’. This leads to increased needs for high-tech R&D facilities or the emergence of EV and Battery production facilities. These new hubs create a ‘flywheel effect’ of related logistics real estate demand from their suppliers.

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Quellen:

(1) Source: McKinsey & Company, ACEA. Note: data as of summer 2023
(2) Source: European Commission. Note seasonally adjusted. NACE level: Manufacture of motor vehicles, trailers and semi-trailers
(3) Source: IEA. Note: only forecast for 2025 and 2030 available. Europe covers EU-27, Norway, Iceland, Switzerland and United Kingdom
(4) Source: Dataforce, Automotive news.

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Eyes on the Wheel: Europe’s Automotive Journey of Adaptation

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Eyes on the Wheel: Europe’s Automotive Journey of Adaptation

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