German auto industry faces big challenges after coronavirus

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The economically essential German car manufacturing industry is emerging from a scathing period of stalling, stopping production and falling sales.The sector supports tens of thousands of jobs in Germany and exports are vital to the economy of the whole country; but demand has dropped and the industry faces great challenges in the transition to greener technology, with experts telling CNBC they fear for its future.

“Car manufacturers are making a significant contribution to the German economy. Nearly a million well-paying jobs depend on the sector, half of which in the prosperous south of Germany, “economist Felix Roesel, who works at the respected German institute Ifo, told CNBC on Tuesday.

“The economic downturn is now testing thousands of jobs, income and tax revenues along the supply chain,” said Mr. Roesel, warning that the auto industry is facing large challenges.

“We will certainly witness a decline in this industry for two reasons. Many automakers cannot use their full potential, as many international supply chains are headstrongly disrupted or public health restrictions still apply in factories. Car dealerships had to close for several weeks, and consumers worried about unemployment and declining incomes were delaying purchases. It is a toxic mixture for car manufacturers. ”

An employee wearing a protective mask removes a cord next to the Opel Insignia and Opel Astra cars, manufactured by Adam Opel AG, as the German states begin the gradual reopening of certain companies, in the Jacob Opel showroom in Ruesselsheim, in Germany on Monday April 20, 2020.Bloomberg

Berlin auto analyst Matthias Schmidt told CNBC that “the market is heading into a slow year – and (was) even on a downward cyclical path before the corona hit, with the German passenger car market down by one year over year in January. and February by 7.3 and 10.8 percent respectively, “he said.

“A trend I see over the next few months could be a market that experiences strong year-over-year increases in the summer months, fueled by government purchase incentives (under whatever as it is) as manufacturers aim to take advantage of a summer with the window of car dealers open, a growing appetite for private mobility after Covid (and) a surge before a possible second corona wave affects the last months of l ‘year. ”

With fewer people likely to travel during the summer vacation period due to the pandemic, the usual slow summer months could be very different this year, with consumers looking to take advantage of these new offers on the table, a- he added.

However, automakers could also take advantage of the crisis by using it to implement layoffs as the industry steps up efforts to streamline production and focus on a new era of electric vehicle manufacturing.

“Manufacturers could even use this Covid climate situation to cut much-needed jobs and become more efficient by using the pandemic as a perfect excuse to bypass powerful unions ready to fight tooth and nail for their members,” said Schmidt.

Stimulation measures

The coronavirus pandemic in Europe saw all but essential businesses shut down for much of March and April, with progressive restrictions lifted in mid-May in most economies. Germany, for example, authorized the reopening of car dealerships in late April, and auto giants like Volkswagen restarted production in early May.

Already under pressure from declining car sales and a complete collapse when the coronavirus was shut down, the country’s auto industry hoped to get help from the German government. Help came last week with Chancellor Angela Merkel’s Christian Democratic Union (CDU) coalition, her Bavarian brother party, the Christian Social Union (CSU) and her Social Party partners. Democrat (SPD), announcing a budget of 130 billion euros (147 billion dollars). ) economic recovery plan.

However, the measures announced for the automotive industry have been somewhat disappointed. While the measures included a temporary reduction in VAT (value added tax) lowering the tax on all products, including cars, from 19% to 16%, and an incentive to purchase 6,000 euros for electric cars cost less than 40,000 euros (an amount that excludes certain premium electric models), industry leaders also hoped for a scrappage program to encourage the purchase of new cars. And while the industry is indeed moving to electric models, petrol and diesel models still account for the bulk of production and purchases.

‘CarTowers’ next to the Volkswagen factory in Wolfsburg, Germany

Morris MacMatzen | Reuters

According to Naz Masraff, director of Europe at Eurasia Group, the biggest losers in the whole are the German auto industry and the heavy-hitting regions, including Bavaria, Baden-Württemberg and Lower Saxony, which are home to huge BMW, Daimler and Volkswagen production plants respectively.

The BMW group’s plant in Dingolfing, a town in southern Bavaria, is the automaker’s largest auto manufacturing site in Europe, employing around 18,000 people and 800 apprentices. Meanwhile, the VW factory in Wolfsburg is the largest car manufacturing complex in the world and the city itself has grown around the factory; it employs approximately 20,000 people.

BMW, VW and Daimler, all of them giants of the German auto industry, are all making inroads into the production of many more electric vehicles, although traditional models still make up the bulk of production. Masraff of the Eurasia group noted that measures by the German government clearly showed a trend towards electric vehicles.

“While the package excluded a general cash incentive to buy new cars, electric cars are promoted with a doubling of existing subsidies. In this regard, it confirms the government’s position on the industry’s future trajectory towards zero emission vehicles. The lack of a car scrapping plan for diesel and petrol cars, which the SPD did not want to include in the final agreement, negates any idea that the combustion engine will be stalled during the recovery period ” Masraff said in a note following the package. ad.

“The doubled premium for electric vehicles – now € 6,000 – shows that Berlin is betting on battery power, knowing that its main car titans VW and BMW have already started a substantial shift towards the production of electric cars. ”

The demand for electric vehicles is certainly increasing. Data from the European Automobile Manufacturers Association (ACEA) in May showed that in the first quarter of 2020, the electrically rechargeable vehicle segment had significantly increased its market share to 2.5% from the same period last year, going from 2.5% to 6.8%. motor cars still represent more than half of the EU market and diesel cars almost 30% of the market.

How does the automotive industry feel?

Daimler is a giant in the German auto industry and its largest Mercedes-Benz plant is located in the city of Sindelfingen in Baden-Württemberg in southern Germany. The plant has been in operation since 1915 and manufactures the flagship Mercedes-Benz model, the S-Class, as well as the E-Class Sedan and Break among other models. The plant employs approximately 35,000 people.

The plant is also a center for innovation and design and, in the future, will also produce electric vehicles and batteries, notes Daimler. But for now, the automaker has told CNBC it is focused on fighting the economic downturn from the coronavirus crisis.

The new Mercedes-Benz cars are transported on railroad cars near the reopened assembly line of Mercedes-Benz AG, operated by Daimler AG, in Sindelfingen, Germany, Thursday April 30, 2020.

Bloomberg

“Looking ahead, a significant drop in global economic output must be anticipated for the year 2020 as a whole. The situation is volatile, which is why we are working with different scenarios. We are adjusting our previous planning, based on the scenario, “Birgit Zaiser, director of production and supply chain management at Mercedes-Benz, told CNBC on Tuesday.

“Given the current spread of Covid-19, the economic impact on Daimler, in detail … cannot yet be properly determined or reliably quantified,” she said.

When asked if the German government could do more to help automakers, she said, “We are in favor of measures that will create customer confidence and strengthen market demand in these times of great uncertainty.”

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