The forced transformation of the automotive industry, a stable source of earnings for almost a quarter of a million Romanians
In the last four months, the COVID-19 pandemic has brought industries all around the world to a standstill, causing everyone to wonder what will happen next and how we can prepare ourselves for the upcoming challenges.
In Romania, the first wave of industries affected by COVID-19 was linked to the ones that required human mobility, such as transportation, hospitality, or tourism. The second wave is now taking place in automotive and manufacturing, that need to reinvent themselves and try to go back to something as close to normality as they can.
The Romanian automotive industry, made of ~600 companies with approx. 230,000 employees, represents a significant part of the economy including both production of cars, the most important ones being Dacia and Ford, and the production of car components with important players like Faurecia, Valeo, and Continental.
According to ACAROM (The Association of Romanian Automotive Manufacturers), the production of cars and car components reached in 2019 approx. 30 BEUR (+3% increase compared to 2018), generating 14% of PIB and 27% of the total export. The production of auto units reached 490,000 units from Dacia and Ford together during 2019, aiming in 2020 for almost 700,000 units.
March 2020 – a milestone in the automotive’s history page
The automotive industry advance stopped, and the production came to an almost complete standstill in March 2020 due to serious threats generated by the COVID-19 pandemic.
Dacia shut down production starting with 19th March and 13,500 employees out of a total of 14,000 were sent into technical unemployment. Dacia began gradually restarting its production on 21st April, aiming to reopen the entire factory on 4th May. Similarly, 6,000 employees from Ford went into technical unemployment from 19th March until 4th May.
Stopping the national and international car production led also to an almost full stop of the local car components production – being perceived for the moment as the most affected industry in Romania, due to COVID – 19 challenges.
Resuming the production, but with great caution
The particularity of the Romanian automotive industry is a high concentration of employees in a definite working place, often thousands of them are working together in an 8-hour shift. “The local automotive companies that resumed their production must go through great changes not to jeopardize the health of their employees. Investments are needed to be incurred to guarantee a high degree of personal hygiene, distancing within workplaces, the ability of fast identification of employees at risk, and isolate those who may be infected.”, mentioned Ionuţ Vintilă, Senior Manager, Audit & Assurance, Mazars Romania.
Certain production processes will be affected and need to be re-designed to comply with the mandatory distancing between employees. Other regulations must be considered when talking about the transport of employees to/from the factory, which are located in rural Romania, the dynamic within factory premises (from the gate to the workplace), as well as the behavior of the employees during breaks. In addition, special measures must be taken when securing the supply chain to cope with local and European travel restrictions for imports of raw materials and exports of finished goods. One particularity of this industry, such as the high degree of automation in production, will certainly help to maintain the desired safety distances.
The automotive companies must be aware that if an outbreak of COVID-19 infection is identified in a plant, then there is a high possibility that the plant will be closed down by health authorities for a long period.
Next steps and the forced transformation of the automotive industry
It may take years for the global automotive industry to return to pre-crisis volumes. While a smaller decline in sales compared to the previous year is expected in the second half of 2020, the industry could undergo far-reaching changes.
According to Dr. Christian Back, Global Head of Automotive at Mazars, “COVID-19 could have a diverse and long-term impact on the global automotive industry”. For decades, the automotive industry has focused on optimizing working capital. What was considered optimal in terms of financing and lean management is now being reconsidered by many automotive companies in terms of production capability. Supply chains are strongly controlled by the OEMs and it remains to be seen to what extent the OEMs will now push for greater regionalization of supply chains to reduce dependency on international partners. “However, the consequences of global crises and worldwide production lockdowns cannot be solved in this way”, adds Dr. Back. Some OEMs are currently rethinking their procurement strategies: potentially switching from one supplier per component to two or even more. This would make OEMs be better prepared in the case of further production lockdowns and individual supplier shortages.
The COVID-19 experience could offer new opportunities to the automotive industry. Travelers could again prefer individual travel options, as the use of public transport is associated with a higher risk of infection. Or they could ask for the introduction of new in-car products, such as anti-virus functions as part of the air conditioning system, for instance.
According to the epidemiologist’s community, it is now more and more clear that we are at the beginning of the COVID-19 pandemic, that could last for years to come. Second and even third waves are expected in Autumn 2020 and Spring 2021.
“Many countries are deciding to relax their restrictions starting May/ June 2020, when it is not clear if the peak was globally reached or if this relaxation is leading to a second peak. But we know that we will have to adapt and perform our personal and professional activities under these conditions. The automotive industry will also have to recreate itself under these circumstances and focus primarily on: the health of their employees, keeping the working capital at an optimum level, but also keeping a constant high-quality level that is ultimately demanded by the customer.”, mentioned Ella Chilea, Partner, Audit & Assurance Mazars Romania.
Fiscal measures with impact on cash optimization
If we take a look at the fiscal area, we notice that the evolution of the pandemic has determined governments around the world to take quick measures to support the business environment. The European Commission considers the COVID-19 pandemic to be „an unusual event that is out of the government control”. In turn, the Organisation for Economic Co-operation and Development – OECD has proposed to governments and tax administrations packages of measures to mitigate the negative impact of the virus: deadlines postponement for filing tax returns and obligations, suspension of penalties/ default interest, suspension of tax controls or enforcement measures, accelerating VAT refunds.
„The measures taken by Romania are similar to those implemented by other states affected by COVID-19 and are certainly beneficial to the automotive industry. We can mention here the technical unemployment indemnity, the possibility of postponing the payment of fiscal obligations during the state of emergency when most factories in the automotive sector have closed their doors or the bonus granted for the payment of profit tax for the first quarter of 2020, as well as VAT refunds without control.”, mentioned Alexandru Stanciu, Manager, Tax Advisory, Mazars Romania.
„Companies must also consider the extent to which they can benefit from the tax facilities already provided by law, such as the additional deduction of research and development expenses when calculating the profit tax, the tax exemption of the reinvested profit or the tax credit related to sponsorships. This is also a good time to identify ways to optimize cash flow. Thus, companies with import operations can apply for a certificate of deferral of VAT payment at customs or for the certificate of the authorized economic operator (AEO), the latter having both an impact on cash optimization (guarantee exemption) and in relation to the customs authorities, offering a privileged status.”, mentioned Bianca Vlad, Partner, Tax Advisory, Mazars Romania.
We expect an acceleration of the digitization process, including at the level of tax authorities, the implementation of technology proving to be essential within the tax administration at a time when the interaction between authorities and taxpayers is limited by the restrictions imposed by the state of emergency.
Faurecia Romania, one of the companies from the first line, fighting COVID-19
The local automotive industry represents a stable source of earnings for almost a quarter of a million Romanians, although the public health crisis has almost paralyzed the entire industry. But for, Faurecia Romania, one of the most important car component players, stopping was not an option. The company decided to stand by their Agile value and to make a meaningful contribution by synergizing their efforts with the local medical and social services: they started producing protection masks in Romania.
“I think adapting is the path for recovery for the whole automotive sector. I foresee the road ahead as being a transformational one, by putting into practice the lessons learned from COVID-19. As the entire sector prepares to restart, the focal point is protecting the people, through defining and implementing new, decisive, safety measures. As we, in Faurecia, prepare for the production to restart, employees Health & Safety remains our #1 priority.”, mentioned Costica Samaru, CFO, Faurecia Romania.
The company implemented an international COVID-19 committee, so they can have a helicopter perspective over the situation in Romania and also across Europe. Having a good sense of measures being taken in other European countries has helped Faurecia Romania building a sense of connection, sharing best practices, and also developing a free environment for expressing concerns and working collaboratively towards solutions. Aside from this, agility and resilience became key words.
“Being agile, for us, means to be very close to our customers, to build stronger partnerships, to be able to immediately respond to their needs. Being resilient, being able to recover after COVID-19, is also strongly connected to finding solutions to generating cash, and properly managing cash consumption. It’s time to collaborate and to synergize, by sharing all existing initiatives and ideas, best practices, but also problems and solutions. If we do that, we will be able to recover much faster and move on, becoming stronger and fit, after we have successfully dealt with a pandemic.”, added Costica Samaru, CFO, Faurecia Romania.