The coronavirus pandemic may have taken the mask off of the German car industry revealing a historic sector that is under extreme financial duress.
Automobile manufacturers have called on the European Union to expand emergency financial assistance and ease some regulatory burdens amid a crash in demand and production freezes.
Due to the continuing shortage of semiconductors, 2021 was another weak year for Germany as an automotive location. Although the current economic and supply crisis may have reached its low point, a return to earlier highs is unlikely. Of course, this hasn’t happened overnight.
Looking back, due to the decline in global demand for passenger cars, production in the automotive industry in Germany (measured by the production index) already fell by 1.7% in 2018 and by a further 11.3% in 2019. This was followed by the coronavirus year 2020 with a production slump of 23.5%.
As the old financial adage goes, it takes money to make money. German automakers have brought this to fruition. Soaring energy prices are at the root of the problem, limiting investments in the automotive sector, where a growing number of companies are facing liquidity shortages.
According to the German Association of the Automotive Industry (VDA), a coalition of more than 620 companies involved in production for the automotive industry in Germany, ten percent of its member companies are currently experiencing liquidity problems, while another third are expecting significant problems in the coming months.
You can also throw rising energy costs into the mix. Germany has high degrees of levies, surcharges and taxes that have an obviously deleterious effect on the sector. And if you think wholesale costs are high in the U.S., Germany has seen energy bills skyrocket since the start of the Ukraine war due to reduced gas deliveries from Russia, pushing up the annual producer price index to a record 45.8% in August.
Let’s look at some of the numbers that have people worried.
The most recent figures from Germany’s Federal Office for Motor Vehicles, the Kraftfahrt-Bundesamt (KBA), show that new-car registrations were down 1.4%, with the German market performing below expectations.
According to Reinhard Zirpel, president of the Association of International Motor Vehicle Manufacturers (VDIK), “The minimal growth in new registrations cannot hide the fact that the German passenger-car market is heading for its worst performance in around 30 years in 2022.” Given the weaker order intake and continued supply-chain disruption, forecasts suggest that new-car registrations will fall by 5% this year, to a total of 2.49 million units.
Energy prices and inflation are the two primary factors affecting this liquidity crunch and are both having a clear impact on consumer behavior.
With list prices increasing, customers are less willing to spend their money on higher-priced new cars. Analysts have also observed that the German government’s planned reduction of subsidies for electric vehicles is having a dampening effect on buying patterns for new cars.
Inflation has stubbornly hovered around the 7% mark in recent months, with economists predicting it could rise again this fall. According to the German Federal Statistics Office, “Energy prices have increased considerably since the war started in Ukraine and have had a substantial impact on the high inflation rate.
Energy prices were 35.6% higher in August 2022 than in August 2021.” As such, many automakers have withdrawn their guidance for the remainder of the year, as revenues have almost completely dried up outside China, where there are early signs of a return to normality.
Companies like Volkswagen AG are burning through roughly 2 billion euros a week according to Reuters. They have paid the price, as its market value has been cut in half from the same period last year.
With no end to the war in Ukraine in sight, and no sign of inflation easing, the trajectory of both the industry and the underlying automakers’ stock values looks to keep declining.