IHS Global Insight Perspective | |
Significance | The European Parliament-commissioned report looks at the broad impact of the current financial and economic crisis across Europe and makes grim reading, particularly for the beleaguered auto industry. |
Implications | Given the auto industry's high fixed costs and capital-intensive research and development (R&D), coupled with its high job "multiplier" status, the impact elsewhere of a major collapse of the sector cannot be underestimated. |
Outlook | The conclusion of the report is far from groundbreaking as it recommends broad-based incentive programmes to stimulate consumer demand, something already working successfully in a number of markets. The option of attempting to shore up vital companies with taxpayers' money is far from ideal as at a basic level the auto companies' business models no longer exist at the current volumes. Furthermore, as witnessed across the Atlantic, this course of action could well result in billions of euro in losses to the taxpayer with little or no tangible gain as the companies in question fail to reverse their fortunes and enter bankruptcy anyway. |
In response to a European Parliament-commissioned report entitled Impact of the Financial and Economic Crisis on European Industries, published by the Economic and Scientific Policy department earlier this month, the European automotive industry body, ACEA, has pronounced the current crisis "devastating" for the automotive industry with serious implications for the wider economy.
ACEA says that the current crisis is threefold in nature: financial, economic, and structural:
- Financial: There is currently drastically limited access to credit, and even when available the cost of credit is high, both for vehicle manufacturers and their suppliers and also for potential buyers of cars and trucks.
- Economic: There has been a dramatic drop in demand for both passenger cars and commercial vehicles.
- Structural: Companies are facing low margins due to an increasingly complex and diverse product portfolio and an increasingly pressing demand to adapt manufacturing, logistics, vehicles, and R&D to meet environmental needs. The report says that the automotive industry is the "engine" of the European economy: around 1 in 10 jobs in Europe depend directly or indirectly on the automotive sector, while the industry is the largest investor in innovation and R&D and a formidable export force (see http://www.acea.be/index.php/news/news_detail/global_insight_the_crisis_is_devastating/).
The European Parliament-commissioned report summarises the current crisis facing the European auto industry, an important keystone of the European economy. The report's executive summary states that vehicle manufacturing down the automotive supply chain represents an enormous one-third of all manufacturing jobs in the EU-27 and that the industry invests annually over 20 billion euro (US$26.2 billion) in R&D and is the leading industrial contributor to net external EU trade. Its importance increases when including vehicle distribution and associated financing sector activity, which directly or indirectly supports 13 million jobs. Vehicle taxes contribute 360 billion euro to member states' revenue.
The report finds that:
- For more than a decade, sales in the European Union (EU) have oscillated within a relatively narrow trading range (16.7 million to 17.7 million units). Starting in mid-2008, sales decisively dropped below the floor of this range and then crashed further in the final quarter of the year. By January 2009, vehicle sales were running 3.5 million units below these trend rates. The shock of this, combined with a synchronised crash in key automotive export markets, means that the situation has already deteriorated beyond the worst-case, pre-crisis contingency planning of even the most cautious manufacturers.
- Consensus forecasts for the industry predict a 20% slump in vehicle production in the EU-27 between the start of 2008 and the end of 2009. This approximates to a loss of over 60 billion euro in industry revenue. Capacity utilisation rates have already fallen to 65% in what is a high-fixed-cost industry.
- The automotive industry is currently one of the hardest-hit sectors of "the real economy" amid a recession triggered initially by the financial crisis (surveys show that over 50% of car dealers have reported increased rejection of car financing proposals). Since it has one of the largest multipliers from upstream resource input through the supply chain down to distribution and financing, there will be lagged second-round effects that will prolong the wider EU economic recession and hamper the initial pace of its recovery.
- The crash in domestic vehicle sales and in key export markets has been so sharp, deep, and synchronised that virtually every single vehicle manufacturer will see significant cash burn, estimated in aggregate at between 18 billion euro and 30 billion euro in 2009 in Europe alone. This requires access to willing and liquid capital markets. Given the tightness in the financial markets, many vehicle manufacturers in the automotive industry with its low margins, high fixed costs (which include labour), and high capital expenditure commitments for new (low-emission) technologies will approach or breach technical bankruptcy.
- This has already led to a spate of demands for government-backed loans to cover the expected losses while sales are so low and with little forward viability of a bottom to the crash in demand. Providing such exceptional funding to the vehicle manufacturers clearly helps shore up their position but the collapse in volumes equally feeds down the supply chain and also to dealerships and a host of small and medium-sized enterprises (SMEs). These will run to many hundreds if not thousands of enterprises that have similar shore-up needs but without the profile, visibility, and logistical administration to securesimilar aid. With unit vehicle assembly volumes falling by one-quarter to one-third, a wave of bankruptcies is predicted across the supply chain during 2009.
Given the most likely environment whereby the vehicle manufacturers themselves are supported from failing, the so called "second best" policy response to deal with this crisis may be to help provide incentives to boost demand so that vehicle manufacturers' output does not fall so severely, lowering their need for "gap" financing while at the same time increasing volume and utilisation rates across the supplier network. In this manner, all the various levels of the supply chain from the major tier-one suppliers to the SMEs, will benefit, effectively reducing the extent of gap financing requirements and helping boost overall levels of economic activity and reducing the demands on state welfare and social programmes (see http://www.europarl.europa.eu/activities/committees/studies/download.do?language=en&file=24671).
Outlook and Implications
The conclusion of the report on the European auto industry is far from groundbreaking as it recommends broad-based incentive programmes to stimulate consumer demand, something already seen working successfully in a number of markets both inside and outside Europe. The impact of doing nothing is also clearly demonstrated in the United States, where the government has done nothing to stimulate the demand side and is instead attempting to shore up individual companies with billions of taxpayers' money. It is rapidly becoming apparent that this is a far from ideal solution, as at a basic level the U.S. (and to some degree European) auto industry's business model no longer exists at the volumes currently experienced. The money would have arguably been better spent stimulating the market and thus negating the need for individual companies to go begging to the government for a bailout. The current situation has left the major player in the United States having to "right-size" its gigantic operations to volumes running between 30% and 50% normal, a near-impossible task. This would take months if not years and result in hundreds of thousands of job losses, and would put further downward pressure on weak economies, adding to the downward spiral that precipitated the action in the first place.
Furthermore, as is rapidly unfolding across the Atlantic, the shoring up of individual company finances could well result in billions of euro in losses to the taxpayer with little or no tangible gain, as the companies in question could well fail to reverse their fortunes and enter bankruptcy anyway. Pulling the industry out of its "devastating" tailspin will take some strong policies and a lot of money, money that now needs to be spent wisely on measures that are proving successful. The option of doing nothing could easily see a "devastated" industry pulled down and this in turn could drag the global economy from recession to depression.