The German auto industry amidst coronavirus

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With the easing of lockdown measures, German carmakers are resuming production activity. Industry associations, carmakers, and activists have all been lobbying for government aid. However, a bigger question has arisen. Germany faces an unprecedented choice. Instead of reviving the auto industry in its conventional format, the government can channel aid to completely overhaul the industry for a sustainable future.

Automakers in trouble

The automotive industry in Germany was struggling well before the pandemic hit. It was plagued by pollution concerns, the ‘Dieselgate’ emissions scandal, and waning global demand. Moreover, the US-China trade wars resulted in higher tariffs. Then came the pandemic. The outbreak of COVID-19 and necessary lockdowns disrupted supply chains and demolished global car sales. Auto behemoths Volkswagen, Daimler, and BMW suspended production at their European plants. The Institute for Customer Insight at the University of St. Gallen called coronavirus the “biggest threat to the global automotive industry since World War II”. The pandemic has disrupted the car industry globally. Auto giants in Europe, China, and the US have been hit hard. Only recently, with some easing of the lockdown, a slow recovery is visible at the Chinese operations of the German carmakers.

“If you need a car today, you’ll need a car tomorrow”

China and Western Europe are the largest markets for German cars. German broadcaster Deutsche Welle reported that in February 2020 auto sales in China crashed by 80%. Passenger car registrations declined by 7.4% in the EU. All major carmakers seemed to be struggling to quantify damages and revise forecasts. The recent recovery of car sales in China by 50%-60% gives some hope to automakers. Auto sector analysts at UBS posit that the automobile sector is different from other industries where lost sales cannot be recouped. Someone who needs a car may not buy it today, but in a month, or three, or six. In other words, global auto sales have not been killed by crises. They have simply been postponed. Some analysts calculated that if the outbreak is contained now, German car sales in 2020 would only drop by 10%-20% from their 2019 levels.

The migrant workforce

Germany’s Federal Statistical Office ‘Destatis’ reports that the German auto industry employs 850,000 workers. It is one of the largest employers in the world. An article in the MIT Press reported that since 1945 migration to Europe has changed dramatically. In preceding decades migration trends were dominated by Europeans moving to the US, Canada, Australia, and elsewhere for work. However, after 1945 Europe experienced a vast inflow of migrant workers. An astounding 80% of workers on some German auto assembly lines are of foreign origin. The Centre of Automotive Research at the University of Duisburg says that over 100,000 jobs at German car manufacturers and suppliers are at risk. A slump in global demand in the wake of the pandemic can result in a manufacturing overcapacity of 1.3-1.7 million vehicles in German factories. A strategic move toward manufacturing electric vehicles would require fewer assembly line workers.

The German auto industry generates EUR 426 billion each year and supports thousands of migrant workers. The families of migrant workers live in the world’s developing nations. They depend on remittance inflows from Germany. Mobile-based solutions such as the Ria money transfer app are gaining popularity. While interim measures for supporting migrant workers have been put in place, the long term impacts remain uncertain.

Opposite ends

The German government is having to address demands on two very different fronts. On the one hand, German carmakers are demanding rebates on diesel and petrol cars. On the other hand, environmental support groups are asking for discounts on electric and hybrid cars. At a Merkel-led video conference, industry leaders debated giving up to EUR 3,000 in subsidies to buyers of diesel and petrol cars, and up to EUR 4,000 for electric and hybrid cars. However, some economists point out that financial incentives for buying cars that burn fossil fuels don’t help protect the environment. A shift toward sustainable technologies is certainly a long term imperative. However, the auto industry is also in need of immediate-term solutions.

The way forward

Most carmakers, when contrasted with the likes of Tesla, have lagged in terms of adopting sustainable, next-gen automotive technologies. This applies equally to US and German auto giants. The global auto industry has largely copied 20th-century technologies and business models so far.

The COVID-19 pandemic has reshaped the economic climate profoundly. Old trends are dissolving and new megatrends are emerging. The German automobile industry is on the brink of a major transformation. Hopefully, the carmakers will make climate-conscious choices and drive toward a sustainable tomorrow.