The banal thing about forecasting is that you are smarter afterwards, but unfortunately only afterwards. The German Economic Institute (IW) declared that the best years for the country’s carmakers have passed, and the all-important auto sector “will fail as an engine of growth” as a result of the coronavirus .pandemic. Berlin-based auto analyst Matthias Schmidt agrees “the market was heading for a slow year – and (was) even on a downward cyclical trajectory before corona hit, with the German passenger car market seeing year-on-year falls in both January and February of 7.3 and 10.8 percent respectively,” he said.
The German car industry was already facing multifaceted woes like high overcapacity and the technological shift towards electrical powertrain even before the coronavirus came along.
The sector is a major employment and export source for the country. About 10% of gross domestic product (GDP) hails from carmakers and their suppliers. “Almost one million well-paid jobs depend on this sector, half of them in the prosperous south of Germany,” says economist Felix Roesel, who works at Germany’s respected Ifo institute. “The economic downturn now challenges thousands of jobs, income and tax revenues along the full supply chain,” Roesel said, warning that the auto industry faces big challenges. More than 930,000 people work directly or indirectly in the auto sector, while 40% of Germany’s overall research and development (R&D) expenditure is made by the industry.
Car makers cannot use their full capacities because many international supply chains are headily disrupted or public health restrictions still apply to factories. Consumers fearing unemployment and income cuts delay purchases. This is a toxic mix for carmakers.
The demand shock due to lockdown measures across the world is compounding problems of oversupply and technological change in the auto industry that already existed before the outbreak of the virus, depleting carmakers’ cash reserves at a rapid pace.
Macroeconomic uncertainty has combined with supply chain disruption. There is a lack of visibility for top-tier suppliers and an irreversible impact on the global auto supply chain.
What is unusual is the weaknesses that are revealed in the global economic system that were previously considered progressive strengths, such as ‘just-in-time‘, ‚lean‘ or global supply chains. The automotive industry, as a prime example of globalisation, is correspondingly extremely vulnerable.
German auto sales slumped by a fifth in August, erasing headway made during the previous month and damping hopes for a rapid recovery in Europe’s largest economy. Germany’s VDA car lobby expects a 25% drop in domestic auto production this year after output through July collapsed to the lowest level since 1975.
Following the “supply shock,” Germany’s automotive industry was facing a “demand shock” from which it is only slowly recovering. The economic uncertainty is delaying purchases too. All this will add to stock days, which are already rising, pricing pressure and negative price trends.
While industry behemoths like Volkswagen (VW) and Daimler are suffering from falling demand and the cost of technological transformation, smaller companies further down the supply chain are struggling for survival. It has been a scathing period of lockdown, production halts and a slump in sales. Volkswagen, BMW and Daimler, have recently all reported heavy losses due to COVID-19. Volkswagen’s earnings before tax suffered a loss of 1.4 billion euros (1.65 billion U.S. dollars) in the first half of 2020. In the same period last year, the company had achieved a profit of 9.6 billion euros.
Sales tumbled 38 percent year-on-year to just over 215,100 according to data from the KBA vehicle licensing authority. At German premium carmaker Daimler, net profit fell 78% in the first quarter, bleeding the company’s cash position down to a meager €617 million ($662 million). “Securing liquidity has top priority now”, says CFO Harald Wilhelm. “Slumping demand, struggling parts supply and a difficult restart of production makes any outlook impossible”.
Companies including BMW AG and Continental AG have announced job cuts and Volkswagen AG reduced its dividend after losing 2.4 billion euros in the second quarter when the pandemic shuttered factories and showrooms.
According to the IW study, almost 60 percent of employees in Germany’s automotive industry had been on short-time work and significant job cuts were expected.
Aid coming from the coalition of Chancellor Angela Merkel’s Christian Democratic Union (CDU), its Bavarian sister party, the Christian Social Union (CSU) and its Social Democratic Party (SPD) partners is a 130 billion euro ($147 billion) stimulus package for the economy. Unfortunately though, the measures discussed to strengthen domestic demand tend to affect consumers rather than capital goods
Germany’s car industry is not a monolithic block; manufacturers as well as large and small suppliers are in very different positions and differently affected by the crisis.
There was some disappointment at the measures that were announced for the car industry, however. While the measures included a temporary VAT (value added tax) cut lowering the tax on all goods, including cars, from 19% to 16%, and a 6,000 euro purchase incentive for electric cars costing under 40,000 euros (an amount that excludes some premium electric models), industry leaders had also hoped for a scrappage scheme to incentivize the purchase of new cars. And while the industry is indeed transitioning to electric models, petrol and diesel models still make up the bulk of production, and purchases.
The biggest losers from the package, according to Naz Masraff, director of Europe at Eurasia Group, are the German automotive industry and auto-heavy regions, including Bavaria, Baden-Wuerttemberg and Lower Saxony, which are home to huge BMW, Daimler and Volkswagen production plants respectively.
BMW, VW and Daimler, who are all behemoths in Germany’s car making industry, are all making inroads into producing many more electric vehicles though traditional models still make up the bulk of production. Eurasia Group’s Masraff noted that the German government measures showed a clear push towards electric vehicles.
According to consultancy Strategy&, the current slump in car demand has further increased the pressure among suppliers to cut costs. At the same time, it said in a recent analysis, more investment in innovation was needed to launch “competitive next-generation alternative vehicles earlier in the markets.”