/Germany’s carmakers face a ‘toxic mix’ of challenges as they emerge from coronavirus crisis

Germany’s carmakers face a ‘toxic mix’ of challenges as they emerge from coronavirus crisis

Germany’s economically-essential car manufacturing industry is emerging from a scathing period of lockdown, production halts and a slump in sales.

The sector supports tens of thousands of jobs in Germany and exports are vital to the whole country’s economy; but demand has fallen and the industry faces big challenges in the transition to greener technology, with experts telling CNBC they fear for its future.

“Carmakers contribute significantly to the German economy. Almost one million well-paid jobs depend on this sector, half of them in the prosperous south of Germany,” Economist Felix Roesel, who works at Germany’s respected Ifo institute, told CNBC Tuesday.

“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.

“We will certainly see a decline in this industry for a couple of reasons. Many car makers cannot use their full capacities because many international supply chains are headily disrupted or public health restrictions still apply to factories. Car dealers had to close for many weeks during the shutdown. And consumers fearing unemployment and income cuts delay purchases. This is a toxic mix for carmakers.”

An employee wearing a protective face mask removes a cordon next to Opel Insignia and Opel Astra automobiles, manufactured by Adam Opel AG, as German states begin the phased reopening of certain businesses, at the Jacob Opel showroom in Ruesselsheim, Germany, on Monday, April 20, 2020.


Berlin-based auto analyst Matthias Schmidt told CNBC that “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.

“A trend I see playing out over the next few months could be a market that sees strong year-on-year gains in the summer months fueled by government purchase incentives (in whatever form these take) as manufacturers aim to take advantage of a summer window of car dealerships being open, a growing appetite for private mobility post-Covid (and) a push before a possible second corona wave impacts the closing months of the year.”

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

Nonetheless, carmakers could also take advantage of the crisis by using it to implement job cuts as the industry accelerates moves towards streamlining production and focusing on a new era of making electric vehicles.

“Manufacturers could even use this Covid climate situation to make much-required job cuts and become more efficient using the pandemic as the perfect excuse to get around powerful unions prepared to fight tooth and nail for their members,” Schmidt said.

Stimulus measures

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

Already under pressure from falling car sales, and then a complete slump during the coronavirus lockdown, the country’s car industry was hoping for aid from the German government. Last week, aid came, with 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, announcing a 130 billion euro ($ 147 billion) stimulus package for the economy.

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.

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

Morris MacMatzen | Reuters

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‘s Group Plant in Dingolfing, a town in southern Bavaria, is the carmaker’s largest vehicle production site in Europe and has a workforce of around 18,000 people plus 800 apprentices. Meanwhile, VW‘s plant in Wolfsburg is the world’s largest single car-manufacturing complex and the town itself has grown up around the plant; it employs around 20,000 people.

BMW, VW and Daimler, who are all behemoths in Germany’s carmaking 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.

“While the package excluded a general cash incentive for purchasing new cars, electric cars are promoted with a doubling of existing subsidies. In this respect, it confirms the government’s stance on the future trajectory of the industry, towards zero-emission vehicles. The lack of a car scrappage scheme for diesel and petrol cars, which the SPD was adamant should not be included in the final deal, quashes any idea that the combustion engine will be propped up during the recovery period,” Masraff said in a note following the package announcement.

“The doubled electric vehicle purchase premium – now €6000 – shows Berlin is betting on battery power, comfortable in the knowledge that its main auto titans VW and BMW have already began a substantial shift towards electric car production.”

Demand for electric vehicles is certainly growing. Data from the European Automobile Manufacturers Association (ACEA) in May showed that in the first quarter of 2020, the electrically-chargeable vehicle segment significantly increased its market share, rising to 6.8% from 2.5% in the same period last year, although petrol-powered cars still account for more than half of the EU market, and diesel cars almost 30% of the market.

How the car industry feels?

Daimler is a giant of Germany’s car industry, and its largest Mercedes-Benz plant is in the town of Sindelfingen in Baden-Württemberg, southern Germany. The plant has been in operation since 1915 and makes Mercedes-Benz’s flagship model, the S-Class, as well as the E-Class Saloon and Estate among other models. The plant employs around 35,000 people.

The plant is also a focal point for innovation and design and in the future, it will produce electric vehicles and batteries too, Daimler notes. But for now, the carmaker told CNBC it is focusing on overcoming the economic hit from the coronavirus crisis.

New Mercedes-Benz automobiles are transported on railway wagons near the Mercedes-Benz AG reopened assembly line, operated by Daimler AG, in Sindelfingen, Germany, on Thursday, April 30, 2020.


“From today’s perspective, a significant decline 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, depending on the scenario,” Birgit Zaiser, manager of Production & Supply Chain Management at Mercedes-Benz, told CNBC Tuesday.

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

Asked if the German government could do more to help carmakers, she said: “We are in favor of measures that will create confidence among customers and strengthen market demand in these times of great uncertainty.”

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