Page 60 - The Economist USA

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60 Briefing The crisis in carmaking
From 60 to zero
The world’s car giants need to move fast and break things
hen carmakers sold 95m cars and
Wcommercial vehicles in 2017 the 100m
mark seemed just around the corner. After
a disappointing 2018 and 2019, this year
was forecast to be a turning point. And it
will be—in the wrong direction. As govern-
ments around the world have ordered fac-
tories to close and locked-down buyers put
off purchases, car sales are expected to
plummet by a fifth (see chart 1 on next
page), to a level last seen in the depths of
the global financial crisis of 2007-09. A
feared second wave of covid-19 makes pros-
pects for 2021 uncertain. The industry, al-
ready facing a precarious and colossally ex-
pensive shift to electric cars, will emerge
from the pandemic transformed—not nec-
essarily for the better.
Most carmakers were fitter going into
this crisis than the last recession a decade
ago. Back then America’s General Motors
(gm) and Chrysler entered bankruptcy and
needed bail-outs. This time balance-sheets
looked stronger, costs had been tamed and
firms had restructured to concentrate on
profitable businesses. Nothing, though,
prepared them for the coronavirus. First
China and then the world went into lock-
down. Car firms, parts suppliers, show-
rooms and repair shops shut.
The immediate concern is survival.
Firms are tapping old and new credit lines
despite high borrowing costs. Ford, an
American firm, is paying a punishing 9%
interest on its newly issued bonds. The
price of insuring its debt against default
has soared since December. Other compa-
nies, too, have seen their creditworthiness
increasingly questioned.
They have no choice but to borrow.
Credit Suisse, a bank, expects gm and Ford
to burn through $10bn and $14bn of cash,
respectively, in the first half of 2020.
France’s psa Group, which reported first-
quarter results on April 21st, and enjoyed
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record profitability before production
stopped, used up €4bn ($4.4bn) of cash be-
tween January and March, leaving it with
gross liquidity of €19bn. Analysts at Jeffer-
ies, a bank, estimate that the eight biggest
carmakers in Europe and America could, in
all, burn over $50bn of cash in the second
quarter. At that rate, they may run out of
money by the end of the year (see chart 2).
Companies are cancelling dividends
and begging governments for assistance.
Across the rich world governments will pay
furloughed workers, whose wages eat up
around 15% of car firms’ revenues, accord-
ing to Morgan Stanley, a bank. In Germany
Volkswagen, bmw and Daimler will use a
videoconference with Angela Merkel on
May 5th to implore the chancellor to revive
a “cash-for-clunkers” scheme like the one
introduced after the financial crisis.
At least factories are opening after hav-
ing been shut for weeks. Those in China are
already up and running. Chinese dealer-
ships are, too. Early signs offer some en-
couragement. Chinese sales collapsed by
80% in February, year on year, according to
the China Passenger Car Association, an in-
dustry body. In March they were down by
two-fifths—still dismal but less so. April
promises to be better. In the first 19 days of
the month sales were down by just 7% from
the same period last year.
Even if sales recover, scars will remain.
Capacity utilisation in Chinese factories
was already low by global standards, at 1