Is a speedy recovery of the automotive sector a pipe dream? – Output could plummet 20-40% due to COVID-19

What do you think is the latest date by which the German car industry will need to resume production in order to avoid severe social and economic losses?

Currently, the government, the industry and the public are doing everything necessary in order to handle the current health crisis caused by COVID-19. It’s a difficult balance between social and economic losses due to COVID-19 vs. social and economic losses due to the shutdown. We believe – and assuming all required public support in the meantime including finance – the important milestone is now to find the right time to start the ramp-up again within the production, within the supply chain but especially also within the sales including clients’ demand for new vehicles.

What are the main bottlenecks hindering production at present?

In our view, the main bottleneck, if we can call it that at all, is the current shutdown of many different steps along the supply chain including the factories themselves.

Is it raw material supply, demand, or safe work environments that will have to be fixed first before production can begin at least at low levels?

We do believe that in order to start production at least at low levels first a safe work environment will have to be established. Then demand for new vehicles will have to be fostered (mix of push and pull including some sort of public/governmental support) and then the supply chain including raw materials etc. will have to be ramped up in order to be able to further increase production.

Let's assume that the crisis will be V-shaped and all restrictions will be lifted by June. In that case, how fast could manufacturing capacities be restored?

Unfortunately, our current projection is that the crisis will be rather U-shaped, considering the entire value chain of new vehicles production. Worst case would lead to a rather flat L-shape. After the past weeks of experience, the optimal case of a V-shape appears as with much lower probability.

How would you assess demand under this scenario? Will deferred demand materialise in this case?

Considering a more probable U- vs. L-shape scenario, the drop of new vehicles production across Europe could reach numbers of approximately -20% to -40% in 2020 as compared to 2019. That dip will most probably not be recovered in 2021 and only normalize back to 2019 levels a few years later (please also see latest extrapolations from IHS).

Would the German car industry be able to meet this sudden increase in demand?

Unfortunately, we currently do not foresee a sudden growth in demand. However, even the slow ramp-up during the recovery period will require a very good co-ordination between the German car industry and suppliers e.g. from CEE.

What direct and indirect effects do you think the temporary shutdown of the car industry will have on the German economy?

Judging from within Germany and looking at how the German car industry and government are currently handling this exceptional situation, the effects appear as actually handled in the best possible way (focusing on the word “possible”). Comparing with many other industries, such as tourism, entertainment or restaurants, the car industry receives lots of attention and as much support as possible (again focusing on the word “possible”).

Will the output level of the German car industry be able to reach the level where it was before the coronavirus appeared? If so, when can this be expected to happen?

In the long run, we do see indicators that previous levels of 2019 might again be reached. However, that is expected only after 2021 i.e. only in the mid-term. One of the preconditions is that the demand of new cars is successfully stimulated.

Do you think major car manufacturers will move production from the current cheaper countries to Germany in order to utilise excess production capacity and to save jobs in Germany?

Most probably the entire industry will start thinking about the trend from a global supply and production footprint to a “glocal” supply and production footprint. However, that goes for all players from raw product suppliers to car manufacturers. We do not explicitly see German car manufacturers moving production from other European countries into Germany.

According to Volkswagen's sales director, we will all have to learn to live with the coronavirus because we cannot stop it. In practice this also means that guaranteeing the safety of workers will result in significant extra costs. What impact will this have on the competitiveness of Germany's car industry?

It is correct that we will all have to learn to live with the coronavirus because we cannot stop it. This especially means that guaranteeing the safety of workers will result in extra costs (at least until vast majority of the public is immune to the coronavirus e.g. thanks to a vaccination). However, those rules of the game apply to most if not all car industry players therefore we do not envision a unilateral decrease of competitiveness.

Do you anticipate a series of bankruptcies in the German car industry?

As of today we do expect that industrial players which had been healthy until the corona crisis hit will also be able to handle this crisis thanks to financial aid. We cannot, however, rule out that players that had been struggling previously might enter bankruptcy. Chances to survive depend strongly on the liquidity of each individual player, differing a lot between suppliers, car manufacturers and for example car dealers.

Who could be the biggest winners and losers of the new situation in the industry?

Winners will most probably be seen among players with strong liquidity, being able to first maintain a strong position throughout the downturn and in addition potentially take advantage of consolidations in the market. Losers will probably be seen among the aforementioned ones that had problems already before the corona crisis.

Do you think the coronavirus pandemic could accelerate consolidation in the industry?

Absolutely, but mainly amongst suppliers, and car wholesalers and dealers.

Even if systemic bankruptcies can be avoided, what painful measures will German companies be forced to take to ensure their survival?

Currently most if not all companies are sending their respective employees on holidays, into reduced working hour agreements and the like. Painful measures start by ensuring, in the beginning, a smart lockdown i.e. optimally managing costs and liquidity, then providing a safe work environment, preparing and managing the recovery and ensuring a stimulated demand for the cars.

How will the current situation affect employment?

Currently, employment is affected in terms of the car industry players coping with the current lockdown by, as mentioned previously, for example sending employees on holidays or into reduced working hour agreements. However, unlike in the case of many other industries, we do not see layoffs here.

When can we expect mass layoffs in the German car industry?

Currently, we do not see mass layoffs in Germany related to the corona crisis. However the corona situation is very difficult to predict and conditions might change. We hope for the public measures to be sufficient to ease the corona crisis for the vast majority of employees.

How will the coronavirus pandemic affect the existing achievements and future spreading of Industry 4.0? Under the circumstances, it would obviously be easier to operate a highly automated and robotised factory, but the sudden availability of large amounts of labour could impede these endeavours.

We do expect a “globalization” to be introduced in the new mid- and long-term footprints of the automotive industry, including elements like Industry 4.0. At the same time, the car industry has very successfully set up the current footprint, invested into modern machines and trained current workers. We do not expect the car industry to lightly throw those assets overboard.

What industry-specific assistance would benefit the German auto industry at present?

Besides public financial aid, similar to the situation in other industries, we could envision the governments supporting the demand for new vehicles during and after the recovery phase. That could, for example, look similar to the measures taken by European states after the global financial crisis in the years 2007-2009.

What will happen to the shift towards e-mobility? Could Germany decide to pressure Brussels to ease tight emission regulations in order to retain its competitiveness in the short term?

There are many different opinions and rumours out there, elaborating in favour as much as against e-mobility in the current situation. As of today, however, we do not see changes to previous agreements being discussed with seriousness.

In the U.S., the Trump administration has already decided to ease emissions rules. How big a competitive disadvantage could this be for German car makers in coming years?

The question is rather whether “corona is an opportunity” for the car industry, after the shutdown to leapfrog into a future with emission reduced vehicles, as opposed to turning back the wheel of time. Most probably there will be different approaches globally. It will be of utmost importance to at least find, decide and then go the one European way.

Do you think Volkswagen could give up on its ambitious plans in e-mobility under the current circumstances?

We can only judge by recent public statements of Volkswagen Group that no such intent is being thought about. We would expect Volkswagen to maintain its ambitious plans in e-mobility.