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Difficult options for the car industry

As the Covid-19 crisis accelerates trends that were already in place worldwide, the car industry faces many challenges ahead.

As the Covid-19 crisis accelerates trends that were already in place worldwide, the car industry faces my many challenges ahead.

by
John Redwood

in Features

27.04.2020

There is helpful talk today of new hospital cases reducing a bit in several countries, and a more active discussion of timetables to gradually reduce the restrictions on business and personal movement. No country is rushing to remove controls – and all are committed to a gradual and cautious path for fear of a second wave and new peak of the pandemic.

Meanwhile central banks develop their policy responses to see what more they can do to offset some of the economic damage being done by the anti-virus policies. Oil prices remain weak owing to the big shortfall in demand.

They used to say when General Motors sneezed the stock market caught a cold. Today the car industry is a shadow of its former self, eclipsed by the giants of the technology world. In March, US car sales fell by 39%, rounding off a weak first quarter with a bad fall. EU car sales were down 55%, with Germany down 38% and Italy a massive 85%. UK sales were down 44% and Indian 45%.

Much of this was the closures brought on by the virus that month, but some reflected a weakening trend that set in before the lockdowns.

Plants in lockdown

Today, many car plants around the world are closed. In Europe, there are some stirrings, with production set to resume at more modest levels in May. Factories will have different shift patterns, more social segregation and less-intensive work patterns to protect employees. Output will remain lower, but so will demand. The rise in unemployment – which creates uncertainty about future incomes – will reduce the number of new car buyers. Many had already been deterred by the growing hostility of governments to diesel and petrol cars, manifest in new policies to phase them out as quickly as possible.

In the UK, diesel car sales were down 62% in March, and down by 51% in the first quarter. The message has been driven home that government wants to see an end to diesel cars, despite the way in which the industry has cleaned up the exhausts and offered better fuel efficiency. The green movement sees the closures and interruptions to output brought on by the anti-virus measures as an opportunity. They argue the world should not revert to lots of new cars burning fossil fuels, but should rebase itself quickly to much more public transport assisted by electric personal vehicles where necessary.

The industry faced a difficult transition before the pandemic struck. It now faces an even bigger task. It needs cashflow and profit to finance the big demands of designing, building and equipping production lines for new electric models. It will have to contract existing capacity for diesel and petrol cars more quickly, writing off investment where necessary. A period of many weeks with little or no cashflow just makes that financing task more daunting.

Europe’s green revolution

The EU is the central driver of green transport in the West. The Commission has promised green growth as its big idea, and will want to build this into its proposed Recovery Fund and plan for after the virus. Whether that will extend to money to allow more and faster plant closures remains to be seen. The European industry also has more work to do on establishing a range of electric vehicles with sufficient customer appeal at affordable prices to replace enough of the lost production on conventional vehicles.

The Chinese industry took a huge hit in February at the peak of its virus troubles, but has been recovering since. The reduction in subsidies to electric vehicles slowed their progress with the conversion.

The new world post virus is likely to see some speeding up of these trends manifest in the industry before closures. Traditional manufacturers will struggle to generate enough cash and profit during this transition, against new competitors trying to take market share from them in the small but fast expanding electric car segment.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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