The world’s car giants need to move fast and break things

When carmakers sold 95m cars and commercial 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 governments around the world have ordered factories to close and locked-down, buyers put off purchases, car sales are expected to plummet by a fifth (see  1), to a level last seen in the depths of the global financial crisis of 2007-09. A feared second wave of covid-19 makes prospects for 2021 uncertain. The industry, already facing a precarious and colossally expensive shift to electric cars, will emerge from the pandemic transformed—not necessarily for the better.

Most carmakers were fitter going into this crisis than the last recession a decade ago. Back then America’s General Motors (General Motor’s) 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 lockdown. Car firms, parts suppliers, showrooms 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 companies, too, have seen their creditworthiness increasingly questioned.

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, according 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 having been shut for weeks. Those in China are already up and running. Chinese dealerships are, too. Early signs offer some encouragement. Chinese sales collapsed by 80% in February, year on year, according to the China Passenger Car Association, an industry 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 75%. It is surely even lower now—possibly below the 65% that, according to an industry rule of thumb, carmakers need to break even. Social distancing is hard on an assembly 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. Volkswagen, 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 Japan in 2011 taught car companies to diversify their suppliers and have alternatives to fall back on. But not all parts can be sourced 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 dashboards, is prohibitively expensive.

Suppliers are also financially feebler than the carmakers they serve. AlixPartners, a consultancy, finds that nearly a quarter of 400-odd stockmarket-listed parts-makers face immediate cash shortfalls. 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, factories cannot run at full steam.