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The Economist April 25th 2020 Leaders 9

Carmakers in trouble
Pimp the ride

How to save a sputtering industry

ven before the recession, investors were deeply pessimistic latedly, going into green technologies. Adaptation would be far
Eabout the car industry. Sitting on $1.3trn-worth of legacy in- preferable to extinction. And yet there is a risk that government
vestments in factories that rely on a technology that ought to be- aid ossifies car firms before they have modernised. State “cash
come obsolete—the internal-combustion engine—the likes of for clunkers” subsidies—which are on the menu in Germany—
Ford,RenaultandVolkswagendon’texactlylookwellpositioned could encourage consumers to buy dirty, internal-combustion-
for the 21st century. Now, with car sales collapsing, a dinosaur engine cars. On March 31st America watered down emissions
business that employs 10m people directly faces a moment of standards in order to help Detroit. Subsidies for idling workers
truth (see Briefing). Long synonymous with hubris and the inept help in the short run, but if they go on for long they risk prevent-
allocation of capital, it needs to look to the future. ing firms from shifting resources from old to new technologies.
Executives say they are better placed today than in 2008-09, The industry should take control of its own fate. Car firms
when General Motors and others received bail-outs. Most firms need to be pioneers in operating factories under new health pro-
havemorecashandbiggermargins.Butthislogicgetsthemonly tocols, from redesigning the choreography of assembly lines to
so far. Production in Europe and North America is now 50-70% providinghealthtestsforworkers.BigWesternfirmsarestarting
lower than a year ago. Car firms have high fixed to re-open some plants. This won’t be lucrative,
costs, so when they run below capacity they lose Global car production but it will stem short-term losses.
money fast. The top eight Western carmakers % decrease on a year earlier Firmsshouldalsoavoidslashinginvestment
0
couldburnover$50bnofcashthisquarter,reck- indiscriminately, as they did in 2007-09 when
ons Jefferies, a bank. At that rate, they may run -20 capital spending dropped by 29%. Most car
out of money by the end of the year. -40 firmshavetwoparts,avastlegacyoperationand
There are other dangers. As recession bites, FORECAST -60 a small, loss-making, fast-growing one making
people may default on car loans, many of which 2019 2020 hybrid and fully electric cars. The danger is that
are owed to carmakers’ finance arms. The value they cut spending on the new bit, slowing the
of second-hand cars is dropping, harming these finance arms developmentofbatterytechnologiesandthelaunchofnewelec-
through their leasing operations. There may be a permanent fall tric models. Better to pare dividends, loss-making foreign ad-
in commuting, as more people work from home—road-passen- ventures and legacy investments.
ger numbers in China are still 57% below their pre-covid level. The final priority is consolidation. Too many mid-sized car-
Thisprospecthelpsexplainwhyoilpriceshavecollapsed(seeFi- makers are clinging to their global aspirations, despite a number
nance and economics section). Investors are jumpy—on April of mergers in recent years, such as Geely’s purchase of Volvo and
17th Ford raised $8bn of debt at painful interest rates of 8.5-9.6%. Fiat Chrysler’s planned union with psa (Fiat’s biggest share-
The only firm that commands their confidence is Tesla, an elec- holderownssharesintheparentcompanyofTheEconomist).The
tric-car specialist, whose shares are up by 64% this year. world still has more than1,000 factories making legacy cars. Re-
Givenitscarbonfootprint,isn’tthereanargumentforthecre- nault and Nissan continue their halfway house of an alliance,
ative destruction of the car industry? If only it were that simple. which brings more complexity than synergy. Adapt, invest in the
Millions of jobs are at risk and the big firms account for about future and join forces. That is the way to a viable car industry—
60% of the industry’s investment, a rising share of which is, be- for the climate, workers and investors, too. 7

Migrants and the virus
Essential workers

The Gulf states have long depended on workers from abroad. Time to return the favour

ife has never been easy for the Gulf’s migrant workers. Most citizens treat them as a subservient underclass.
LThough they are around half of the region’s population and The outbreak of covid-19 has made life even harder for mi-
are essential to its economy, the locals give them little respect. grants, who probably account for most of the recorded infections
Coming from poorer countries such as India, Pakistan and Ne- in the Gulf and are also bearing the brunt of the economic fallout.
pal, most work long hours for wages that are high compared with Many are locked down, out of work and unable to go home be-
salaries back home but low by any other standard. They care for cause of restrictions on travel (see Middle East & Africa section).
Kuwaiti children, nurse sick Saudis and build Dubai’s skyscrap- Some struggle to afford food. Governments should take better
ers. When their workday is done, many are crammed into spar- care of them. That is not only humane, it is also practical. If the
tan dormitories by their employers. Whether visiting workers Gulf states do not start treating their guests with more compas-
have lived in the Gulf for two months or two decades, they are sion, they are likely to find that their outbreaks last longer and
deemed to be “temporary” and are left out of the social contract. that their economies recover more slowly. 1