Page 61 - The Economist USA

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The Economist April 25th 2020
2 75%. It is surely even lower now—possibly
below the 65% that, according to an indus-
try rule of thumb, carmakers need to break
even. Social distancing is hard on an as-
sembly line, where even highly automated
procedures, such as robotically attaching
windscreens, require half a dozen workers
in attendance.
Labour shortages caused by illness, the
need for more deep-cleaning and other
safety measures will be a drag on firms’
productivity for a while. vw, one of several
European firms that will slowly restart
from April 27th, will use experience from
reopening 32 of its 33 plants in China. Its
100-point plan will safeguard workers’
health—but make their jobs harder.
Bigger question-marks hang over the
supply chain. Natural disasters such as a
devastating earthquake and tsunami in Ja-
pan in 2011 taught car companies to diver-
sify their suppliers and have alternatives to (it may not in America, however, where
fall back on. But not all parts can be sourced emissions standards were recently re-
from several parts-makers. As Matteo Fini
of ihs Markit explains, bulky ones like door
panels tend to be made close to factories,
where you are unlikely to find multiple
producers. Doubling up capacity for those
that require pricey tooling, such as dash-
boards, is prohibitively expensive.
Suppliers are also financially feebler
than the carmakers they serve. Alix-
Partners, a consultancy, finds that nearly a
quarter of 400-odd stockmarket-listed
parts-makers face immediate cash short-
falls. Continental, a German producer of
everything automotive from electronics to
tyres, which itself supplies carmakers,
warned that dozens of its suppliers are on
the brink. Without parts and people, fac-
tories cannot run at full steam.
Turning back the clock
The depressing mix of stifled production
and uncertain future sales will crimp pro-
fits. Margins were under pressure before
the pandemic slump, in part owing to in-
vestments in electric vehicles (evs), partic-
ularly in Europe, where emissions targets
are tightening. Now capital spending and
research-and-development budgets are
under review. The thorny question of what
resources to allocate to evs and other fu-
ture technologies has gained new urgency.
In the words of Dan Levy of Credit
Suisse, the industry is running on “two
clocks”. The first marks time in the near
term, when investment in fossil-fuelled
vehicles, which provide the bulk of profits,
has to continue, not least to ensure that
firms have money to invest in electric ones
(as well as self-driving cars and mobility
services). On this clock companies will
keep selling evs at a loss for several years.
On the second, longer-term clock, battery
prices will fall enough to ensure profitabil-
ity (see next article). But margins on evs
may not match those of conventional auto-
mobiles for a while, if ever.
Herbert Diess, vw’s boss, alluded to the
complicated equation when he said in Jan-
uary that the car industry would have to
“slaughter some sacred cows”. vw has
made a start with the industry’s biggest bet
on the future, vowing to plough €60bn into
evs and other new technologies over the
next five years.
The question is whether motorists are
interested. The take-up of electric cars has
been slow except in China, where the gov-
ernment has lavished subsidies on the
technology to turn its carmakers into
world leaders. In Europe, where consum-
ers worry about range, charging infrastruc-
ture and cost, only two in every 100 cars
sold last year ran on pure battery power.
Carmakers have not (yet) asked for relief
from Europe’s tougher emissions rules, so
the proportion of ev sales will have to rise
laxed). But buyers will be pulled in two di-
rections, says Andrew Bergbaum of Alix-
Partners. The pleasure of breathing cleaner
city air during lockdowns may persuade
some to go for evs. Many others will hold
on to older petrol cars for longer—especial-
ly with falling oil prices, a glut of cheap sec- thinks that even joint development of
ond-hand cars foreclosed from unpaid
leases and fewer incentives from cash-
strapped governments to buy electric.
Covid-19 may, then, slow electrifica-
tion—but will not derail it. Car firms must
sooner or later press ahead with efforts to
make evs profitable. Some are pooling re-
sources in areas where profits are highest.
gm’s decision to sell its loss-making Opel
unit to psa in 2017 and get out of Europe
was an early example. The mega-merger
announced last year between psa, which
has turned a profit at Opel by wrapping it in
its larger European business, and Fiat
Chrysler is still on track. (The chairman of
Fiat Chrysler, John Elkann, sits on the
board of The Economist’s parent company.)
More consolidation looks certain,
though perhaps not through full mergers,
which have a mixed record in carmaking.
Braking bad 1 holders of the sort that protect vw and bmw
Car production, % change on a year earlier
FORECAST
20
Japan & South Korea Europe*
0
China
-20
South
Middle East & Africa Asia -40
-60
North
South America America -80
2019 2020
Source: IHS *Excludes Russia
Briefing The crisis in carmaking 61
Cash for clunkers 2
Selected carmakers, Five-year
months of liquidity in credit-default
a zero-production scenario swap spreads
Basis points,
April 2020 Apr 22nd 2020
0 3 6 9 12
BMW 142
Daimler 169
Volkswagen 203
PSA 294
GM 378
Renault 371
Ford 997
Fiat Chrysler 457
Sources: Jefferies; Bloomberg
Investors would welcome efforts to reduce
the duplication of investment, which has
long depressed returns. They can expect
more alliances to pool scarce resources,
such as one announced last year by bmw
and Jaguar Land Rover to jointly develop
evs. Another between Ford and vw to share
electrification costs could become more
intimate. Morgan Stanley sees “no limit” to
their collaboration. Patrick Hummel of ubs
next-generation petrol engines may make
sense. Alliances, though, are complicated.
The biggest, between Renault and two Japa-
nese firms, Nissan and Mitsubishi, may fi-
nally snap under the strain of coronavirus.
Elongated
The pandemic will not hurt everyone
equally. Tesla in particular has had a good
crisis. The electric-carmaker enjoys a big
backlog of orders, enough liquidity to see it
through the downturn—and no petrol-en-
gine legacy to shed. Its share price has re-
gained ground since a dip in March. Only
Toyota has a higher market capitalisation.
The Japanese giant and vw, which make
roughly 10m cars each annually, should
weather the storm. Chinese companies
may look for cheap bargains abroad. Two of
them, Geely and baic, already hold big
stakes in Daimler (maker of Mercedes
cars), which does not have strategic share-
from takeover. Mass-market firms, mostly
operating on wafer-thin margins, will
struggle. Taxpayers look likely to prop up
some weaklings, like Renault.
The biggest concern may be that the vi-
rus changes attitudes to cars. On the one
hand, fear of infection may put commuters
off trains, buses or ride-hailing, and into
automobiles. On the other, more home-
working may reduce commuting of any
kind, including with your own set of
wheels. A prolonged recession could dam-
age sales for good. Carmakers of the future
may yet look back nostalgically to 2017 as
their industry’s peak. 7