Carmakers-bumpy ride ahead

Global economy is severely impacted by the outbreak of Coronavirus, the automotive industry is facing serious heat on the account of factory shutdown, supply chain disruption and dealers lockdown.

Passenger-car sales have begun to pick up in the past few weeks after screeching to a halt earlier this year due to the coronavirus pandemic and sweeping containment measures.

Leading the recovery is China, the world's biggest automobile market, where new car sales have exceeded expectations for a rebound to near pre-pandemic levels, following a 79% crash in February.

Premium brands have performed even better, clocking year-over growth as their customers - with higher savings and better employment - showed more resilience to the economic shock caused by the pandemic than the working class. Germany's premium brands Porsche, Audi, BMW and Mercedes-owner Daimler, which sell 30-40% of their cars in China, dominate the luxury car market.

According to UBS auto analyst Paul Gong, German brands outperformed the market up to June thanks to overall consumption upgrade, and we haven't seen any change of trend yet.

However, China's sharp recovery remains an exception among major markets. While new car sales elsewhere have also recovered from their pandemic lows, they remain well below pre-crisis levels.

Earnings slump

According to the CFO, Securing liquidity has top priority now. 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).

New car registrations in Europe's biggest single market Germany fell just 5% in July, after skidding 61% in April. Europe as a whole - the biggest car market for flagship German cars besides China - also saw sales recover from their April lows. In the United States, another key market, the trend is no different.

German carmakers on edge

The virus hit German carmakers at a time they were already reeling from pollution concerns, exacerbated by the Dieselgate emissions scandal, waning global demand, higher tariffs caused by US-China trade tensions and a costly transition to electric and self-driving cars.

Now the fragile recovery has them on the edge. Volkswagen was forced to cut its dividend last month to conserve cash. Europe's largest carmaker, which was sitting on an enviable cash pile of €26 billion ($31 billion) at the end of 2019, burned through more than €2 billion in the second quarter. The carmaker expects operating profit to fall "severely" this year.

Daimler is of the opinion that in July it would deepen cost cuts despite the recovery in demand that saw it post its best second quarter sales so far in China. BMW, which posted its first quarterly loss in more than a decade on Wednesday, expects pretax profit to be significantly below last year levels.

The sales slump has exacerbated the European auto industry's problem of overcapacity. According to Dudenhöffer- Founder and Director of CARD (Center Automotive Research in Duisburg) , there is an overcapacity of 6-7 million cars. He expects serious overcapacity to remain this year despite the rebound in demand and factories operating well below capacity.

In June, the carmakers got a major snub in their home market when Chancellor Angela Merkel's coalition refused to provide any major incentives for the purchase of conventional petrol and diesel cars, for which they had lobbied hard. The French government is providing incentives such as cash-for-clunkers to encourage customers to trade in their older cars, which are credited to have propelled car sales above 2019 levels in June.

European auto industry drives into an uncertain future

Adding to the woes of the carmakers is the uncertainty surrounding the coronavirus. There is no clarity on how soon the virus, which continues to disrupt life in the key car markets of the United States, Brazil and India, can be contained. Experts are already talking of a second wave in Europe, where cases are gradually picking up. While there have been some encouraging developments on the vaccine front, there is still no certainty on how soon we will have one.

The economic turmoil unleashed by the pandemic will continue to weigh on the auto industry, whose health is inextricably linked to the health of the economy and the job market. The IMF projects the global economy to shrink by 4.9% this year, followed by a partial recovery in 2021, implying a cumulative loss to the global economy over two years (2020–21) of over $12 trillion (€10.14 trillion) from this crisis.

Millions of jobs have been lost so far due to the pandemic, with the US being one of the worst-hit. Europe has managed to keep unemployment in check thanks to government-backed wage subsidy schemes, but experts say that jobless rates could soar once the incentives run out, hurting demand for cars.

The European Automobile Manufacturers' Association (ACEA) in June "radically" revised its 2020 forecast, expecting passenger car registrations to fall 25%. By comparison, UBS' Gong expects the Chinese passenger car market to decline by only 5% this year.

Changing customer behavior

The current rebound in sales has also been attributed to an increasing demand from first-time buyers looking to shield themselves from the coronavirus. But according to Gabriella Dickens from Capital Economics, the growing trend of working from home "will probably at least partially offset any rise in demand due to avoidance of public transport."

After all, the car is the most popular method of commuting in most major economies. In the UK, for instance, around 67% of workers use their cars to travel to work.

A survey by automotive consulting firm Berylls Strategy Advisors showed that COVID-19 was changing car buying behavior worldwide, causing budgets to shrink, purchases to be postponed and switch to cheaper models. In the US, where the job market remains a cause of concern, many customers are settling for used cars.

Sales of electric vehicles continue to increase, mainly driven by demand from Europe, where stricter emission targets are set to kick in from next year and where governments are increasingly incentivizing greener cars.

German carmakers, which are pumping billions of euros into electric vehicles and other greener technologies, are yet to fully ride the trend having come late to the party. In 2019, VW and BMW together sold less than two-thirds of the electric vehicles sold by Tesla, which has zoomed past the likes of Toyota and VW to become the world’s most valuable carmaker.

The evolution of consumer perception is a long process and will necessitate time to anchor German brands as credible and sustainable EV providers in consumers' minds compared with dedicated EV manufacturers.

Infact, German manufacturers have the financial means and the motivation to invest in electrification, to avoid financial penalties and reposition as long-term players in the sector.

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Source: www.dw.com