Author: Filip Brokeš

Analyst, journalist specializing in international relations

The future of Europe’s automotive sector

Europe’s automotive industry has experienced a severe downturn since the onset of the COVID-19 epidemic. From a short-term perspective, the key to recovery in Germany and CEE will be the pickup in sales in the largest markets, the US, China and Germany itself.
The future of Europe’s automotive sector

Polkowice, Poland (Volkswagen Motor Polska, Public domain)

Ever since the outbreak of the COVID-19-related health crisis in Europe, the continental car industry has plunged into a deep recession. It has been hit particularly hard on two fronts: one is the drastically reduced production due to temporary closing of factories across the continent; and the other one has to do with the falling sales. Although car factories are slowly being reopened, the demand is unlikely to pick up any time soon as most consumers have other things to worry about than purchasing a new vehicle at the moment.

European Automobile Manufacturers Association (ACEA) has published figures on new passenger car registrations across the European Union. In May, registrations of new cars fell by 52.3 per cent y/y. In April, the early drop was even more dramatic — a whopping 76.3 per cent, according to the ACEA. For the sake of comparison, in May 2019, slightly over 1,2 million new cars were registered in the European Union. The corresponding figure for May 2020 was just over 580,000. “Spain saw the biggest decline among the four EU markets (-72.7 per cent), while sales fell by roughly half in France (-50.3 per cent), Italy (-49.6 per cent) and Germany (-49.5 per cent),” the press release says. The overall demand for new passenger cars in the EU decreased by nearly 42 per cent from January to May 2020, reflecting a sharp decline on the demand side.

On the supply side, the image is equally bleak. Due to factory shutdowns in Europe, the carmakers on the continent lost nearly 1.5 million vehicles, according to figures published by ACEA in April 2020. “In terms of employment, the jobs of at least 1.138.536 people working in EU auto manufacturing have been affected by these shutdowns so far,” the press release states.

No better news is coming from Germany — the continent’s most important car-producing country and one of the largest car markets in the world. According to the Union of German Automobile Industry, the domestic car industry is currently dealing with some of the worst economic results since the unification of the country a few decades ago. “In March new passenger car registrations in Germany were 38 per cent down on last year, falling to 215,100 units. This is the largest slump on the car market in a single month since Germany’s reunification nearly thirty years ago,” the Union says in a press release.

Domino effect in CEE

Given the existence of a free market in Europe, economic vows of major manufacturers spread quickly throughout the continent. Perhaps nowhere else this fact applies more than in the European auto industry. Although clearly centered around the industrial powerhouse, Germany, the car making industry in Europe is a complex system of contractors and sub-contractors, both small and big, spread out across the EU. A finished car is a composite of multiple layers of value added in various places. The system is borderless.

Even though the production chain extends to all “corners” of the free trade area, it is particularly centered in the countries of central Europe which are heavily exposed to any fractures in the system. This is due to the overreliance of their economies on car making industry, which applies to Slovakia and the Czech Republic in particular, and, to a lesser extent Poland. In times of crisis, such as the one the world is currently facing, this single-directional economic make up of those countries fully exposes their weaknesses.

Due to factory shutdowns across the region, tens of thousands of vehicles, which had been planned to be produced, never left the assembly lines. According to Statista, the Czech Republic, home to the well-known car manufacturer Skoda Auto, had to cut off the biggest losses — nearly 84,000 vehicles. Slovakia followed with a loss of 52,000, with Poland (43,000) and Hungary (34,000) in the third and fourth place, respectively.

According to an analysis of Ceska Sporitena, a Czech branch of the Austrian Erste Bank, the Czech automobile industry experienced an unprecedented shock — a near halt of car production. In April 2020, the number of new cars made in the country dropped to a nearly 12 per cent of the amount made in April 2019. To be specific, if Skoda and other car producers in the country produced just above 130,000 vehicles in April 2019, the production dropped to a mere 15,000 a year later.

Similar numbers are seen in the neighboring Slovakia, where, according to a magazine Pravda, massive layoffs of workers in the car industry could come in the second half of the year, provided that the situation doesn’t improve.

According to Deutsche Welle, the Polish automotive sector has been the worst-hit domestic sector in the coronavirus pandemic, with passenger car production down 99 per cent on an annual basis. “For most of April, passenger car production was on hold after the suspension of factories at Fiat Chrysler, Opel (Peugeot-Citroen) and Volkswagen, all of which suspended production in the second half of March. In March, only 20,100 cars were produced, 52 per cent less than a year earlier,” the German broadcaster says.

Hoping for a global recovery

Falling demand for new passenger cars in central Europe and across the continent is definitely a worrying issue for the automotive industry. However, it is important to keep in mind that the European car market is only a piece of the pie. Globally, sales in other major markets bring home even more revenue than domestic sales in Europe.

According to Worldexports, United States was by far the biggest car importer in the world in 2019, spending nearly USD180bn on imported cars and accounting for 23.2 per cent of the global market. The US was followed by Germany (9.1 per cent), China (6.1 per cent) and the United Kingdom (5.7 per cent).

As far as the most important Asian market is concerned, there are already signs that China’s automotive sector might be headed towards a recovery. Figures of China’s Association of Automobile Manufacturers show that the production and sales of the automotive industry have recovered significantly in April this year. “In April, auto production and sales were 2.102 million and 2.07 million units, respectively, up 46.6 per cent and 43.5 per cent m/m, up 2.3 per cent and 4.4 per cent y/y, respectively,” the Association says in a press release.

These numbers show that car sales and production in China have not only recovered from the pandemic but are also exceeding the results from the previous year. However, a slightly more long-term results are less optimistic. “From January to April, auto production and sales were 5.596 million and 5.761 million units, respectively, down 33.4 per cent and 31.1 per cent y/y, respectively,” the source says.

In the United States, the current situation doesn’t provide much reason for optimism. According to the US federal data, the global health crisis has plagued the country’s car industry since March 2020. In February, the monthly sales were still comparable to the same month last year. However, the following months of March, April and May have been extremely difficult for the industry. The amount of cars sold in March 2020 was 11.7 million, down from 17.7 million a year earlier. In April, the corresponding figures were 9 million and 17 million.

A slight reason for optimism might be sales in May which went up to 12.5 million, but still nowhere close to the 18 million sold vehicles in May 2020. It will probably still take a long time before the numbers came back to what they were a year ago.

All eyes on Germany

That being said, Europe is still an important market for domestic auto makers. Germany, in particular, is still the second largest car importing country worldwide, and a key market on the continent. For a recovery of demand for new passenger cars in Europe, developments on the German market are crucial. This is why all important players in Europe’s auto industry have been nervously awaiting Berlin’s decision to provide subsidies for the battered car-making giants in the country, such as Volkswagen, Daimler or BMW.

Hopes were high that strong enough fiscal stimulus from the German government could resuscitate the country’s automotive industry, and, by extension, the whole system of suppliers and sub-contractors all across Europe. In particular, it was widely expected that Berlin would introduce a scrapping bonus program, whereby buyers of new cars would be financially compensated for having their old ones liquidated. This tactic has proved helpful to put car sales back on track during previous crises.

However, much to the dismay of many industry people, the government in Berlin decided to go in a very different direction. In early June 2020, Germany’s ruling coalition approved a stimulus package worth EUR130bn. The package includes EUR50bn for research on the use of hydrogen technology, artificial intelligence (AI) and 5G mobile connectivity.

About EUR5bn has been allocated for new EV charging stations, research on battery cells and, importantly for consumers, purchases of new, environment friendly cars. This will come in the form of a premium for purchases of electric, but also hybrid cars, which was doubled from EUR3,000 to EUR6,000.

The name of the federal funding program speaks for itself — “innovation bonus”. Experts in Germany view this as a clear message from the federal government to the domestic auto industry, making it obvious that the car-producing companies will be offered financial help only in their transformation process to producing more sustainable and environmentally friendly vehicles. The end of bonuses for buyers of all new cars — except for the electric ones — comes despite the fact that in 2019 more than 91 per cent of all cars made in Germany were still classic combustion engine models, according to Handelsblatt.

But although still there are not really any affordable electric vehicles from German companies, the major German car makers are clearly steaming ahead to the new age of driverless, electronic vehicles. For example, in late May 2020, Volkswagen spent EUR2bn on the expansion of its presence in China’s electric car industry. It first spent about EUR1bn by buying control of its electric vehicle venture with Chinese partner. Then the German carmaker spent another EUR1bn to become the biggest shareholder in a Chinese battery producer, according to India Times.

Need to adjust

The current political climate in Europe’s key automotive country will likely have a long-lasting impact on the automotive industry throughout the continent. From a short-term perspective, the key to recovery of both sales and production of new cars will be the speed at which the most important markets, mainly the United States, Germany and China, can recover the loses of recent months.

However, from a long-term perspective, the crisis-induced change of heart in Berlin over the type of financing for the domestic automotive industry seem to speeding up the transformation processes that has been taking place in the industry for several years now. EU leaders have long been lamenting over Europe’s key car makers falling behind their US and Chinese competitors, such as Tesla or BYD, the world’s first and second largest EV makers, respectively.

The future will undoubtedly be electric, and very likely self-driving. Experts talk of a smartphone on four wheels. German and other European car-makers will have to seriously step up their game to be able to compete with their Chinese and American competitors.

Key component and services providers in places like central Europe will also have to quickly adjust to the new needs. Being heavily export oriented, countries such as the Czech Republic, Slovakia, or Poland, are particularly vulnerable to changes on the global market. In the electronic, self-driving car era, new skills and products will be needed. Only those able to adapt will survive.

Filip Brokeš is an analyst and a journalist specializing in international relations.

Polkowice, Poland (Volkswagen Motor Polska, Public domain)