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Global Insight: The crisis is devastating

The economic recession and financial crisis have a ‘devastating’ effect on the automotive industry with serious implications for the wider economy.

Read the full report by Global Insight

Global Insight, a Paris bases research institute, has analysed the importance of the automotive industry for Europe and investigated the impact of the current crisis on the sector and, subsequently, the wider economy. The study was commissioned by the European Parliament Industry Committee and finished in March 2009.

Excerpts from the executive summary:

One of the sectors hardest hit

The Automotive industry is currently one of the hardest hit sectors of ‘the real economy’ in a recession triggered initially by the financial crisis.
The downturn in the automotive sector will have lagged second round effects, because the automotive industry has one of the largest ‘multipliers’ (creating economic activity in other parts of the economy through the supply of materials and tools as well as through vehicle sales, after sales services and in transport related business). This may well prolong the wider EU economic recession and hamper the initial pace of its recovery.

Crash in sales

For more than a decade, sales in the EU have stayed within a relatively narrow trading range (16.7m to 17.7m units). Since the summer of 2008, sales decisively dropped through the floor of this range and crashed further in the final quarter of the year.

By January 2009, vehicle sales were running 3.5m units lower than the trend rate. This shock, combined with a synchronized crash in key automotive export markets, has brought reality beyond worse case pre-crisis planning of even the most cautious manufacturers.

Access to finance is key

The crash in domestic vehicle sales and in key export markets has been so sharp, deep and synchronized globally that virtually every single vehicle manufacturer will see significant cash burn, estimated at between €18bn and €30bn in 2009 in Europe alone.

This requires access to liquid capital markets. The automotive industry is characterised by low margins, high fixed costs (which include labor) and high capital expenditure commitments for new (low emissions) technologies. Given the tightness in the financial markets, many manufacturers will approach or breach technical bankruptcy.

Slump in manufacturing

Forecasts for the industry predict a 20% slump in vehicle production in the EU27 between the start of 2008 and the end of 2009. This adds up to a loss of over €60bn to industry revenue. Capacity utilisation rates have already fallen to 65% in what is a high fixed cost industry.

The collapse in volume feeds equally down the supply chain and also to dealerships and a host of SME’s. These will run into many hundreds if not thousands of enterprises which have similar shore-up needs but without the profile, visibility and logistical admin to get similar aid. With unit vehicle assembly volumes falling by a quarter to a third, a wave of bankruptcies is predicted across the supply chain during 2009. Vehicle manufacturers use up to 800 suppliers.

Government support

Government support may help prevent vehicle manufacturers from failing, but the situation for suppliers will remain difficult. Here, a ‘second best’ policy response may be to boost demand levels,  keeping vehicle output up, lowering the need for ‘gap’ financing while at the same time increasing volume and utilization rates across the supplier network.

In this manner, all the various levels of the supply chain from the Major tier 1 suppliers to the SME’s will benefit. This will effectively reduce the extent of gap financing requirements, help boost overall levels of economic activity and reduce pressure on state welfare and social programs.

A vital industry

From vehicle manufacturing down the automotive supply chain, the sector represents an enormous one third of all manufacturing jobs in the EU27. The industry invests annually over €20bn in Research and Development and is the leading industrial contributor to net external EU trade.

Its importance increases by including vehicle distribution and associated financing sector activity which directly or indirectly supports 13 million jobs. Vehicle taxes contribute €360bn to member state revenue.

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