The impact of the COVID-19 crisis on the automotive industry. Scenarios for this year’s evolution
The automotive industry faces major challenges even before the pandemic crisis, such as high costs of investing in new technologies, autonomous vehicles, mobility and connectivity solutions, a lack of charging infrastructure and ambitious EU CO2 reduction targets. Now, they come with a significant drop in global sales, a slowdown in production, affected supply chains and problems in providing liquidity and financing.
Most factories in the automotive industry have gradually opened up, but are not operating at full capacity. The rather difficult social distance on an assembly line, the shortage of labor caused by sick leave or the time required for sanitation or to apply other safety measures influence the productivity of companies in the next period. At the same time, consumer demand fell in the short term, leading to the collapse of new vehicle sales, the postponement of non-essential maintenance costs and non-payment of car loans, many of which were due to manufacturers’ leasing or lending companies.
The four scenarios for the evolution of the European car industry in 2020
In this context, according to the PwC report “COVID-19 Automotive Perspective”, outlines four possible scenarios for the evolution of the European car industry this year, which estimates a decrease in production between 10.7% and 32.6%, and sales of cars between 20.8% and 38.5%.
1. If the production deficit in February-April is not compensated, but demand recovers and there are offers to arouse customer interest, car production in Europe could fall by 10.7% by the end of 2020, and sales will would decrease by 20.8%.
2. Following the lifting of restrictions, European governments quickly agreed and coordinated sales incentives, as in 2008-2009, which help manufacturers and dealers sell existing vehicle stocks. The immediate effects of incentive schemes on production volumes are limited at best, if they are not adapted to environmentally friendly and new vehicles, leading to the immediate demand for replacement of old cars. Under these conditions, a reduction of 26.3% of production in 2020 and 32% of sales is estimated.
3. Production is recovering, but at a slower pace, due to damaged supplier networks. The disruptive effects on the economy and suppliers lead to a gradual recovery spread over several quarters. Thus, car production in Europe would collapse by 32.6% and sales by 38.5%.
4. After the summer, there will be a second wave of COVID-19, which can be controlled more effectively with more targeted measures. The overall effect is structural and will continue in the coming years. In this scenario, production would decrease by 15.7% and sales would decrease by 26.4%.
How is Romania?
For car production in Romania, a vulnerability in this period is the dependence on exports, which are very difficult to recover. Exports of cars and car components represent 46.6% of Romania’s total foreign deliveries, and in the first six months of the year they recorded a drop of over 20%, according to the National Institute of Statistics. Also, car sales register on the Romanian market, according to the number of newly registered cars, a decrease of over 34% in the first seven months of 2020, compared to the same period last year.
The measures already taken by the Government, such as supporting technical unemployment during the state of emergency, faster VAT refunds and postponing the payment of taxes, have ensured a certain liquidity for the producing companies during this period.
In addition, the authorities could take a set of measures to improve the age of the Romanian car fleet, in order to support less polluting vehicles. In this context, the continuation of the “Scrap” program, with a focus on the purchase of electric and hybrid cars, and the development of electric charging infrastructure would be a plus.
For many companies in the global automotive industry, the COVID-19 crisis has highlighted issues that already needed attention and whose resolution can no longer be delayed, such as optimizing the product range and investment portfolio. Long-term review of supply chains is also essential to be prepared for any scenario, given that one of the main concerns and vulnerabilities remains the possibility of a second or third pandemic wave.
Opinion by Daniel Anghel, Partner, Service Leader for the Automotive Industry, PwC Romania