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Coronavirus Wrecks Europe Auto Industry: Rough Road Ahead

Rimmi Singhi

The European auto industry is gradually grinding to a halt as various auto bigwigs are cutting production due to the coronavirus scare and faltering demand. The deadly virus, which originated in China, has now spread across nations. The number of confirmed cases has crossed 200,000 globally, killing over 8,000 people. Last week, WHO declared Europe as the epicenter of the outbreak, with the number of reported cases rising rapidly across the continent. With Italy being the worst hit European nation with reported cases topping 31,000, the country is under strict lockdown. Spain and France have also announced severe restrictions on travel and public life. With stricter guidelines to contain the spread of the virus, automakers are putting brakes on European production.

European Auto Market Already in Doldrums, Coronavirus Adds to Woes

The auto industry in Europe has been badly hit by effects of the deadly virus at a time when it was already grappling with sluggish production and demand in key markets, challenges related to rollout of EVs and detrimental effects of the trade wars.

European carmakers were already caught in the crossfire of U.S.-China trade tiff as the auto industry is complex with supply chains crossing borders. Brexit uncertainty and waning car demand in China amid economic slowdown had already taken a toll on Europe’s auto market. As it is, Europe is heading toward a material tightening of carbon emissions in 2020 and 2021. Switch to electro mobility will require high capital investments but the trade tussle has worsened the cash position of various European premium manufacturers.

As the industry fights tough CO2 rules and consumers worry about a recession, automakers in Europe are having a tough time. Germany—which is Europe’s largest market—has been severely hit by lower exports of manufactured goods to a sluggish Chinese economy, whose prospects are still clouded. Even other European nations are far from strong and witnessed auto sales and business sentiment decline in 2019.

As if these concerns weren’t enough, the coronavirus outbreak has further ripped apart the auto industry of Europe. Mounting COVID-19 cases are likely to dent customer traffic in showrooms and cause supply chain disruptions. Amid the growing crisis, various manufacturers are temporarily scaling back European production.

Factory Closures Across Europe

Germany-based auto biggie Volkswagen VWAGY—which owns the Audi, Bentley, Bugatti, Ducati, Lamborghini, Porsche, Seat and Skoda brands— is also preparing to temporarily close all its European plants in the wake of the health hazard. Operations will be suspended at Pamplona plant in Spain, Setubal in Portugal and Bratislava in Slovakia before the end of this week. The company’s Spanish unit, Seat, halted all operations on Tuesday. Skoda has also reduced production at its Czech factories. Audi will stop production at its plant in Belgium, Germany, Hungary and Mexico for two-three weeks. Lamborghini is also shuttering operations in Italy until Mar 25. Ducati’s production, which has been halted since Mar 13, will remain until Mar 25.

Other Germany-based auto giants including Daimler AG DDAIF and BMW AG BAMXF are also suspending most of their production in Europe as the government scrambles to tackle the pandemic. Both Daimler and BMW carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Daimler—which owns the Mercedes-Benz luxury car brand—is shutting down factories as well as administrative departments for two weeks initially, starting this week. The firm will be shutting down majority of production across all its business segments namely Mercedes-Benz cars, Daimler trucks, Mercedes-Benz vans, and Daimler buses. With Europe accounting for around 40% of Daimler’s total revenues, the firm will be dealt a huge blow, having already witnessed a big drop in earnings in 2019.

BMW will be shuttering its dealerships and plants in Europe by the end of this week, which will last until mid-April. The company will suspend its manufacturing facilities at Oxford and Swindon for four weeks until Apr 17.

U.S. carmaker Ford F is temporarily suspending production at its vehicle assembly plants in Cologne and Saarlouis in Germany along with its engine factory in Craiova, Romania, effective Mar 19, which will continue for a number of weeks. The Cologne and Saarlouis factories build the Fiesta and Focus sedans for European markets. While these models have been discontinued in the United States, they remain hot-selling vehicles in Europe. On Monday, the company closed its Valencia assembly plant in Spain, which manufactures European version of the Escape SUV, Kuga.

Italian-American automaker Fiat Chrysler FCAU is halting operations at most of its European plants at Melfi, Pomigliano, Cassino, Mirafiori, Grugliasco and Modena for its Fiat and Maserati units until Mar 27. The firm’s factories in Serbia and Poland are also likely to shut down. PSA Groupe, which is set to merge with Fiat Chrysler,will be temporarily closing 15 factories in seven countries including France, Spain, Germany and the United Kingdom until the end of March.

Japanese auto giant Toyota TM intends to suspend operations at all its major plants across Europe over the course of this week until further notice. The company has already halted operations at its plant in Valenciennes, France, on Tuesday for an underdetermined period. The factory builds Toyota’s best selling model in Europe, the Yaris small hatchback. The Burnaston plant in Derbyshire— which currently manufactures new Corolla— along with Flintshire facility in Deeside—which produces engines— was shut down yesterday. Factories in Poland, including the e-CVT hybrid gearbox plant in Walbrzych and the hybrid engine plant in Jelcz-Laskowice, also halted operations on Wednesday. While the joint Toyota and PSA plant in Kolin in the Czech Republic is to shut today, the C-HR assembly plant in Sakarya, Turkey will suspend operations from Saturday. Toyota is also halting operations at its plant in Ovar, Portugal—which builds the Land Cruiser— for at least two weeks.

Renault announced on Monday that it would be ceasing production at 12 of its industrial sites in France in compliance with the measures taken by the French government. The company has not indicated when it is going to resume operations. Nissan NSANY has halted operations at its Sunderland factory, which builds about 440,000 vehicles a year. Luxury carmaker Ferrari is also closing down two of its manufacturing plants in Italy amid supply chain disruptions.

Major European auto suppliers including brake manufacturer Brembo are also halting their production, making it highly probable that the German automakers will have to cease operations for scarcity of parts in the near future.

The Road Only Goes Downhill

The auto sector is at the crux of Europe's manufacturing industry, providing employment to nearly 14 million people. The virus outbreak, which has led to factory closures, shook supply chains and weakened consumer confidence, has dealt a huge blow to the industry.

Year 2020 is certainly going to be a tough year for automakers with the COVID-19 outbreak posing serious operational and financial challenges. With significant increase in the number of cases across Europe and the associated lockdown measures undertaken by the government, the near-term sales outlook appears quite uncertain with increasing disruptions in logistics and supply chains, which are only likely to intensify in the coming weeks.

Industrial watchdogs expect a heavy fall in European auto sales in the coming months. The sales decline will make it an uphill task for the industry to generate the funds needed for the technological change to tackle climate crisis. While European carmakers, like Volkswagen and BMW, are already warning a difficult year ahead, there are concerns about sustained economic impacts.

Automotive experts are voicing concerns that the struggling car industry of Europe may not regain lost ground even when the outbreak is over and that the automakers may well have to navigate through several quarters of recession.

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Click to get this free report Ford Motor Company (F) : Free Stock Analysis Report Nissan Motor Co. (NSANY) : Free Stock Analysis Report Toyota Motor Corporation (TM) : Free Stock Analysis Report Daimler AG (DDAIF) : Free Stock Analysis Report Fiat Chrysler Automobiles N.V. (FCAU) : Free Stock Analysis Report Bayerische Motoren Werke AG (BAMXF) : Free Stock Analysis Report Volkswagen AG (VWAGY) : Free Stock Analysis Report To read this article on click here. Zacks Investment Research