Bumpy road ahead for German carmakers

Passenger-car sales have begun to pick up in the past few weeks after screeching to a halt earlier this year due to the coronavirus pandemic and sweeping containment measures.

Leading the recovery is China, the world's biggest automobile market, where new car sales have exceeded expectations for a rebound to near pre-pandemic levels, following a 79% crash in February.

Premium brands have performed even better, clocking year-over growth as their customers — with higher savings and better employment — showed more resilience to the economic shock caused by the pandemic than the working class. Germany's premium brands Porsche, Audi, BMW and Mercedes-owner Daimler, which sell 30-40% of their cars in China, dominate the luxury car market.

"German brands outperformed the market up to June thanks to overall consumption upgrade, and we haven't seen any change of trend yet," UBS auto analyst Paul Gong told DW.

However, China's sharp recovery remains an exception among major markets. While new car sales elsewhere have also recovered from their pandemic lows, they remain well below pre-crisis levels. New car registrations in Europe's biggest single market Germany fell just 5% in July, after skidding 61% in April. Europe as a whole — the biggest car market for flagship German cars besides China — also saw sales recover from their April lows. In the United States, another key market, the trend is no different.

"It is still too soon to assess whether the recovery in sales is due to a catch-up effect after weeks of virtually non-existent showroom traffic or a stronger underlying trend," Emmanuel Bulle, senior director at Fitch Ratings, told DW. "A lot of recent buyers needed a car and went to purchase it as soon as they had the opportunity."

If the demand is indeed being driven by customers who are believed to have postponed their car purchases amid lockdowns, then the recovery could stall once the delayed purchases are made, experts say.  

German carmakers on edge

The virus hit German carmakers at a time they were already reeling from pollution concerns, exacerbated by the Dieselgate emissions scandal, waning global demand, higher tariffs caused by US-China trade tensions and a costly transition to electric and self-driving cars. 

Now the fragile recovery has them on the edge. Volkswagen was forced to cut its dividend last month to conserve cash. Europe's largest carmaker, which was sitting on an enviable cash pile of €26 billion ($31 billion) at the end of 2019, burned through more than €2 billion in the second quarter. The carmaker expects operating profit to fall "severely" this year.

Daimler said in July it would deepen cost cuts despite the recovery in demand that saw it post its best second quarter sales so far in China. BMW, which posted its first quarterly loss in more than a decade on Wednesday, expects pretax profit to be significantly below last year levels.

"The situation is as bad a situation we have had in the car industry or in the economy as a whole in the last 100 years or so," Ferdinand Dudenhöffer, founder and director of Center Automotive Research in Duisburg, told DW, adding he does not expect the industry to recover to its pre-crisis levels for the next 6 years at least.

The sales slump has exacerbated the European auto industry's problem of overcapacity. Dudenhöffer says there is an overcapacity of 6-7 million cars. He expects serious overcapacity to remain this year despite the rebound in demand and factories operating well below capacity.

In June, the carmakers got a major snub in their home market when Chancellor Angela Merkel's coalition refused to provide any major incentives for the purchase of conventional petrol and diesel cars, for which they had lobbied hard. The French government is providing incentives such as cash-for-clunkers to encourage customers to trade in their older cars, which are credited to have propelled car sales above 2019 levels in June.  

European auto industry drives into an uncertain future

Adding to the woes of the carmakers is the uncertainty surrounding the coronavirus. There is no clarity on how soon the virus, which continues to disrupt life in the key car markets of the United States, Brazil and India, can be contained. Experts are already talking of a second wave in Europe, where cases are gradually picking up. While there have been some encouraging developments on the vaccine front, there is still no certainty on how soon we will have one.

The economic turmoil unleashed by the pandemic will continue to weigh on the auto industry, whose health is inextricably linked to the health of the economy and the job market. The IMF projects the global economy to shrink by 4.9% this year, followed by a partial recovery in 2021, implying a cumulative loss to the global economy over two years (2020–21) of over $12 trillion (€10.14 trillion) from this crisis.

Millions of jobs have been lost so far due to the pandemic, with the US being one of the worst-hit. Europe has managed to keep unemployment in check thanks to government-backed wage subsidy schemes, but experts say that jobless rates could soar once the incentives run out, hurting demand for cars.

"We expect the pandemic to leave deep scars on the European and global economy and particularly on the automotive industry as new vehicle sales are typically well correlated with economic indicators such as GDP growth, unemployment, and consumer and corporate confidence," Fitch Ratings' Emmanuel Bulle says.

So the European Automobile Manufacturers' Association (ACEA) in June "radically" revised its 2020 forecast, expecting passenger car registrations to fall 25%. By comparison, UBS' Gong expects the Chinese passenger car market to decline by only 5% this year.

Changing customer behavior

The current rebound in sales has also been attributed to an increasing demand from first-time buyers looking to shield themselves from the coronavirus. But Gabriella Dickens from Capital Economics says the growing trend of working from home "will probably at least partially offset any rise in demand due to avoidance of public transport."

"After all, the car is the most popular method of commuting in most major economies. In the UK, for instance, around 67% of workers use their cars to travel to work.," she said in a note.

A survey by automotive consulting firm Berylls Strategy Advisors showed that COVID-19 was changing car buying behavior worldwide, causing budgets to shrink, purchases to be postponed and switch to cheaper models. In the US, where the job market remains a cause of concern, many customers are settling for used cars.

Sales of electric vehicles continue to increase, mainly driven by demand from Europe, where stricter emission targets are set to kick in from next year and where governments are increasingly incentivizing greener cars.

German carmakers, which are pumping billions of euros into electric vehicles and other greener technologies, are yet to fully ride the trend having come late to the party. In 2019, VW and BMW together sold less than two-thirds of the electric vehicles sold by Tesla, which has zoomed past the likes of Toyota and VW to become the world’s most valuable carmaker.

"The evolution of consumer perception is a long process and will necessitate time to anchor German brands as credible and sustainable EV providers in consumers' minds compared with dedicated EV manufacturers," Bulle says. "On the other hand, German manufacturers have the financial means and the motivation to invest in electrification, to avoid financial penalties and reposition as long-term players in the sector."