German carmakers are going to have to open up their factories and car dealerships again soon – otherwise they could face a widespread collapse. And that would be disastrous for the German economy.
By Simon Hage
Up until only a short time ago, Elmar Degenhart, 61, spent several days a week traveling around the world to meet with customers and employees. Since the outbreak of the corona crisis in mid-March, though, he has been running Continental, one of the world’s largest automotive suppliers, from a desk in the living room of his home near Darmstadt, Germany.
The room is filled with ceiling-high shelves crammed with books, and four singlets are hung on the wall. They recall the time before the shutdown, when Degenhart regularly ran marathons in Hanover. The Continental CEO is managing what he describes as “the biggest crisis of the past 50 years” from home.
More than 40 percent of Continental’s 249 factories are temporarily closed, and more than half of the company’s 60,000 employees have been sent into the German government’s Kurzarbeit work furlough program. The assembly lines of the entire automobile industry, the job guarantor and prosperity motor of the German economy, have ground to a halt. Degenhart warns that the standstill can’t be maintained for much longer. “If the car industry can’t get back on track soon after Easter, many smaller suppliers will be threatened with bankruptcy,” he says. In the worst-case scenario, the international production network would be “deeply and lastingly impaired,” says the Continental CEO — with devastating consequences for the economy.
The longer the corona crisis lasts, the louder industry calls will grow for politicians to finally name a date for the easing of the shutdowns in order to provide companies with some planning security. Because as quickly as manufacturing was stopped and supply chains disrupted, they can’t simply be restarted overnight.
Trial of Strength
The automotive industry in particular is facing a trial of strength for which there is no historical precedent. In order to prevent a collapse, companies need to get their shuttered factories opened again this spring. But no one knows whether the virus can be halfway contained by then. Degenhart fears that it will likely remain a problem for him and his colleagues “for at least a year or longer.” It’s also entirely unclear when the customers who are currently hoarding pasta and toilet paper will start buying cars again.
Whereas the shutdown occurred virtually overnight, the restarting of manufacturing will take weeks, if not months. International supply chains must be integrated, and borders have to be reopened so that trucks with manufacturing components aren’t stuck in traffic jams. That will be impossible without support from the European Union member states.
Degenhart can already see dangerous cracks in the system. In normal times, Continental has 30 to 50 suppliers it keeps in its sights that are threatened with payment difficulties. That number has doubled in recent weeks. “And I assume it will continue to rise,” the CEO says. “So far, we have only seen the beginning of the crisis – the second and third quarters could be much more difficult.” Many suppliers are still living from business they received at the beginning of the year. “But by the end of April or at the latest in May,” Degenhart warns, “that inflow of cash will dry up.”
Two weeks ago, the bosses of VW, BMW and Daimler conducted a conference call with German Chancellor Angela Merkel. They expressed their desire for greater planning security for the industry and also their hope that Germany could become a trailblazer in Europe for the economic recovery. In that call, the chancellor declined to provide a concrete date for the possible loosening of the shutdown, saying it was still too early for that. Even her announcements since then, regarding the careful opening of schools and some shops, is surely not the breakthrough the automobile industry was looking for.
But suppliers in particular need clarity about when production can start again, says Continental CEO Degenhart. He says they need at least one week’s notice in order to be able to supply automobile manufacturers with the parts in a timely manner.
Leading economists have also declined to make forecasts regarding a date for kick-starting the economy. Still, they have argued that sectors with a low risk for infection, such as highly automated factories and high value-added businesses should be brought back into operation as soon as possible. Those were the conclusions drawn in a proposed exit plan from the shutdown presented last week by 14 influential German researchers.
Among the economists involved in the paper was Clemens Fuest, the president of the Munich-based Ifo Institute, a respected economics think tank. He warns of the massive economic damage that is being caused by the shutdown. Fuest estimates that even just a two-month shutdown would generate costs of up to a half-trillion euros.
However, the researchers also stipulate that the economy can only be restarted at a point when the health risks for the populace are calculable. First, there need to be stocks of sufficient protective clothing, masks and testing facilities.
For now, car companies also want to fundamentally restructure their manufacturing operations. Volkswagen’s board of directors, for example, decided last week on a 100-point plan for combating the pandemic, which has far-reaching consequences for the way its approximately 630,000 employees around the world work.
In Phase One of the plan, the group will focus on “maximum health protection,” says Andreas Tostmann, the member of the management board for the VW brand responsible for manufacturing. Under the plan, employees must take their temperature each morning and go through a health checklist before going to work. In sensitive areas like assembly, where employees used to stand shoulder to shoulder on the assembly line to screw doors or roofs to the car bodies, protective masks will be mandatory.
Walking paths in the factories are being re-routed and extended to prevent unnecessary encounters. A half-hour break between shifts is also planned in order to break up the usual hustle and bustle that happens on the factory premises during the shift change.
This all may sound straightforward, but its consequences are far from minor: For the first time since Henry Ford established the assembly line 100 years ago, the industry is now systematically focusing on deceleration and, as such, on a decline in output.
It’s still unclear exactly when and under what conditions manufacturing will resume. Originally, VW had hoped to begin limited production last week, but that turned out to be wishful thinking. On Tuesday of this week, the company allowed its first 1,700 workers to begin the production of individual components at a handful of plants so that it can ensure production in China – the only location in the world where the company’s assembly lines are currently in operation.
Resumption Hinges on Europe’s Reopening
For mass production in Europe, however, VW is dependent on hundreds of suppliers in Italy, from which the company purchases important components like valves and injection pumps. Most of the European automobile industry, including manufacturers and parts suppliers, will only really be able to resume significant production after countries like Italy, Spain, Slovakia and Poland relax their restrictions on public life. At the moment, it doesn’t appear that this is likely to happen quickly.
The government in Rome has made it clear to industry representatives that it is unlikely factories will be able to be opened up across the country before April 27. For German manufacturers, this would mean that they would only be able to begin production on a larger scale again in May. BMW and Ford Europe have already said that the beginning of May would be the earliest point at which production could start again. Daimler has announced that it wants to start up assembly lines at some of its plants as early as April 20, initially in single-shift operation, but as a precaution, the company has extended its worker furlough program until the end of the month.
The fact that each European Union country is operating based on its own crisis planning also makes a ramp-up difficult. Many inner-European borders will remain closed for the time being. At times, trucks carrying car parts or finished vehicles are stuck in traffic jams for hours. And in some cases, border officials are asking drivers to go into quarantine for 14 days. There is no way at the moment of guaranteeing the smooth transport of goods, without which the export industry would grind to a halt.
In response, German car companies are demanding improved coordination at the EU level. “It’s not helpful when countries go it alone,” says Hildegard Müller, president of the German Association of the Automobile Industry (VDA). VW CEO Herbert Diess, who prefers discussing e-mobility, has conspicuously been calling for “greater European solidarity” lately. He also advocates an aid measure that has so far been frowned upon in large parts of the German government: euro bonds, recently recast as corona bonds. The VW head argues that communitized borrowing could be used to help economies like those in Greece, Italy and Spain get back on their feet.
It’s an issue that Elmar Degenhart also supports. “If we do not manage to support each other in a fair way, what is the point of Europe?” he asks.
Those views, of course, are not entirely free of self-interest. Italy and Spain don’t just host important companies in the supply chain, they are also important sales markets. When manufacturing begins again throughout Europe, customers in the southern parts of the Continent will need to have money in their pockets before they start thinking about buying cars again.
Europe Must Maintain Competitive Edge
There are also geostrategic interests. Executives at companies in Europe want to strengthen the European market in order to establish it as a counterweight to the United States and China as economic powers. “It would be fatal,” says Degenhart, “if we Europeans were to lose our competitiveness in mobility, an industry with a promising future, during the crisis.”
This is all the more true given that China, where the coronavirus originated, appears to be emerging from the crisis faster than the rest of the world. Most automobile plants in China have resumed their manufacturing operations and car showrooms are open again. According to VW, the company’s sales, which had fallen radically, have returned to half of their pre-crisis levels in the country.
But a return even to that level of economic activity is still a long way away in Germany, where the effort to ramp up manufacturing is already failing as a result of the complicated coordination between the government, manufacturers and suppliers. VW and other companies are in urgent need of parts – otherwise their stock reserves would last for perhaps a week at best. Suppliers, in turn, can only begin production when they receive binding orders from the car companies, which is close to impossible right now. At the moment, companies don’t even have a feel for what demand might be like because every car dealership in Germany has been closed since mid-March.
Manufacturing based on guess work would be a risky undertaking for companies. The storage areas at manufacturers and at dealerships could overflow quickly. This has prompted industry representatives to demand that the government allow car dealerships to be reopened as quickly as possible.
A Need To Boost Demand
But what happens if customers don’t start buying cars again?
In order to boost demand, the automotive industry is hoping for a large-scale government stimulus package with tax breaks and bonuses. Car industry bosses took advantage of their call with the chancellor two weeks ago to propose a cash-for-clunkers scrapping incentive for older gasoline and diesel vehicles. The industry has had positive experiences with the instrument, which helped it make a rapid comeback after the 2009 financial crisis. From the perspective of CEOs at carmakers, reintroducing the incentive program would make a lot of sense because passenger cars in Germany are an average of almost 10 years old.
The German government is fundamentally open to the idea. Five years after the diesel scandal, anger over the car industry’s scams seems to have largely dissipated. Now, it is a matter of securing the future of Germany’s most important industry – and the 1.6 million jobs that are directly or indirectly linked to it. Provided that the companies commit themselves to climate protection and e-mobility in return. At the moment, the discussion is focused on a scrapping incentive with an environmental component. The lower the car’s CO2 emissions, the higher the subsidies would be. It’s still likely that the incentive would primarily be used to the benefit of vehicles with conventional combustion motors, though, because incentives already exist for buying e-cars.
German manufacturers aren’t in a position to supply e-cars on a large scale yet, anyway. They were already having trouble building electrically powered vehicles even before the corona crisis. One of the main problems plaguing those efforts is a shortage of batteries, whose production has been further complicated by the shutdown. Car manufacturers argue that any car that gets bought by a customer after the shutdown is vital, regardless whether it has an electric or combustion engine.
No executive is willing to make any prediction on how quickly the car businesses will pick up again. Continental CEO Degenhart fears an extended dry spell. And it will probably take years before the industry reaches the production levels seen in the record year of 2017.
Degenhart, for his part, just ordered a bicycle.