Europe’s Auto Makers, Weakened By Coronavirus, Vulnerable To Chinese Incursions

The European automotive industry is recovering from the depths of a coronavirus-crisis induced collapse in sales, but some famous players may be horribly scarred by the experience although no actual fatalities are expected.

China will emerge as a winner, as its successful players pick off some of the upheaval’s wounded in Europe. Even massive manufacturers like France’s Renault may find themselves in difficulties, while Tata Motors of India-owned Jaguar Land Rover could be eager to do deals with well funded candidates from China. Germany’s Daimler, parent of Mercedes-Benz, is on the defensive as its profits shrink. The most endangered species though are small specialist luxury outfits like Britain’s Aston Martin and McLaren.

And as European carmakers reel from the pandemic impact, the European Union’s (EU) insistence that electric cars must be purchased, despite much resistance from consumers wedded to cheap internal combustion engines (ICE), this will open a second front of weakness which Chinese players will be eager and willing to breach.

Industry forecasters like GlobalData point out the drastic hit the world-wide industry will take this year. Its latest forecast predicts the world market for cars and SUVs will fall 17.2% in 2020 to 73.6 million.

“This is a bigger one-off shock than witnessed in the two years of the (2008-2009) global financial crisis,” said GlobalData analyst Calum MacRae.

“However, vehicle markets are on the turn as we get into the second half of the year. China was first in to the crisis and was first out. China’s light vehicle (cars and SUVs) market was up 8% in May and South Korea’s was up nearly 10%. In Europe we’re seeing some improvement to vehicle markets now, too, helped by government subsidies for new vehicle purchases,” MacRae said.

Worst in 30 years

And even though Europe’s carmakers are pulling themselves out of the tailspin, its recovery won’t stop big damage to the industry. Data from Germany, Europe’s biggest auto market, shows a 40% drop in June sales to 220,000 compared with the same month last year, the worst performance in 30 years.

Latest forecasts predict Europe’s auto sales will be down closer to 20% for the year, an improvement on the 30 to 32% falls expected a month ago.

Professor Stefan Bratzel, director of the Center of Automotive Management (CAM) in Germany said the European industry was in trouble before the coronavirus struck what was an enfeebled structure.

“There is a quite critical situation for many carmakers at the moment and especially for smaller players as they run out of money because of the shutdown of production in Europe and elsewhere. Corona has accelerated structural problems we already had, with more capacity than demand especially in Europe,” Bratzel said in an interview.

“Before corona, we knew the market wasn’t growing any more in Europe, so a few players will have to reduce capacity, among them big operators like Renault and Fiat, Nissan has lots of difficulties, and even Volkswagen, the leader in market share in Europe, has problems. But the German companies will end up winners after corona passes,” Bratzel said.

(Fiat Chrysler will likely merge with Groupe PSA of France in the first quarter of 2021, if EU regulators can be convinced the combination is good for the market.)

Felipe Munoz, global automotive analyst at JATO Dynamics, agreed there will be victims of the pandemic and that the trouble had started to set in way before the disease struck.

“This didn’t start with the pandemic, the auto industry was already having problems. Last year was not good for profits and sales of the big manufacturers, China stopped growing so carmakers that were not in a good position when this started were already shaky. The weakest ones will get bought by maybe other big Chinese operators. Many will be forced to cut back their model line-ups,” Munoz said.

“Will there be deaths? I’m not sure anyone will disappear but some massive things will happen. There will be big changes, with China going after and buying companies,” Munoz said.

Looking a bit further ahead, Peter Wells, Professor of Business and Sustainability at Cardiff Business School, said the industry will have to grapple with other problems as it reinvents itself with new technology and different attitudes to cars.

Massive changes

“Changes are going to be massive as governments try and do something about car usage, with car-free zones and as companies use more digital solutions that will mean a significant reduction in commuting, reduced business travel and mobility. That will hit the car business, and notwithstanding the fact people will be reluctant to go back to public transport, the market is not just going to bounce back,” Wells said.

“I have strong fears for the future of the British auto sector, while in France, the government will take a very nationalistic line. I’m still not convinced of the viability of the PSA/Fiat Chrysler merger. Ford and VW are getting closer, Daimler and BMW will survive, although there’s a question mark about the future of Aston Martin and McLaren,” Wells said.

Ford and VW have a cooperation deal for vans, pickup trucks and electric cars. Luxury sports car and soon to be an SUV maker Aston Martin has been in trouble for a couple of years, shed its CEO Andy Palmer, and is now under new ownership. McLaren has faced a liquidity crunch and has recently been bailed out by new finance.

Despite the assumption that German carmakers are the healthiest and will survive, investment bank Landesbank Baden-Wuerttemberg, said there will be a loss of jobs of about 100,000, as what it calls these unstoppable trends like electrification and digitization force an upheaval. This will also make software leadership essential, threatening incursions from technology companies.

Currently about 830,000 Germans work in the industry.

“Coronavirus will not stop the megatrends in the automotive industry, but rather accelerate them. The flip side of this structural change is the impending loss of at least 100,000 jobs in the German automotive industry in the next few years. Since change cannot be stopped, everyone involved should face these challenges,” the bank said in a report.