The crisis in the global automotive industry as a new challenge for logistics – part 1
The crisis in the global automotive industry as a new challenge for logistics – part 3
The German market collapsed sharply in August 2008, improved slightly in September, and began a downward slide in the fourth quarter of that year. Consumer uncertainty regarding the dramatic developments in US financial markets and the unknown impact on Germany was the cause of the mid-2008 slump. This process was reinforced by a drastic decline in orders from abroad, which particularly affected the export-dependent German industry.
Two-thirds of new vehicle purchases in Germany had previously been supported by external financing, half of which was leased. Leasing activity itself is burdened with high risk. In the fight for market share, manufacturers and dealers outbid each other with favorable leasing rates that had nothing to do with the actual value of the vehicles. This means that in times of crisis, the outstanding residual value of used cars is a fictitious value, implying the need for higher depreciation write-offs. Risk insurance became more expensive. The danger of insolvency increased not only in the case of consumer loans but also for loans granted to commercial companies. In November 2008, the number of bankruptcies among commercial companies rose by 20%. In addition to commercial companies, so-called “automotive banks” play an increasingly important role in financing car purchases. In the past, they were an important source of income for automotive groups. In the case of BMW, the share of the Financial Services department in profit generation in 2007 was about 20%, for Volkswagen 17%, and for Daimler 7%. However, such institutions must cover their financial needs on international capital markets, and this is currently much more expensive. For VW Financial Services, as the first automotive bank, this was sufficient reason to seek state aid for refinancing car loans in order to ensure cheap and necessary liquidity in financial markets. The effect is that the conditions for financing new car purchases have worsened, which reinforces the decline in demand. Under the conditions of a long-standing competitive strategy aimed at displacing competitors from the market, commercial companies are affected by the decline in demand and worsening financing conditions. Also in the market for commercial services (car sales), there has long been excess capacity and concentration processes to the detriment of independent dealers. Commercial companies operating under agreements with car manufacturers must fulfill many mandatory obligations, which constitute a noticeable financial burden. This applies to many elements in the sphere of marketing activities, such as mandatory constant lighting of the sales area and the compulsion to have a specific number of vehicles in the showroom’s display offer. These cars must be purchased and paid for, regardless of when they are sold. The increase in the cost of credit and leasing conditions directly affects the financial results of car trading companies. Despite the permanent use of high price discounts, there remains an excess of offers to be realized.
Suppliers are particularly susceptible to the effects of the crisis. Not only because manufacturers have always demanded investments in new technologies from them on the one hand, and exerted pressure on cost reduction on the other. Suppliers are in a situation of compulsion because payment terms in the case of automotive groups, ranging from 60 to 120 days, are considered “normal”. In extreme cases, they are extended to a year, which means they must finance their material purchases and production with trade credit. However, banks are restrictive in a crisis situation, and credit insurers demand insurance for it in the short term. This undermines the existence of suppliers.
One of the significant effects of the financial crisis is a further increase in excess production capacity in the global automotive industry. In 2009, it amounted to about 30%. North American manufacturers made the right decision by reducing capacity corresponding to the production of 4 million units since 2008. In Europe, signs of such actions are also observed. Companies that suffered losses as a result of the crisis are implementing significant restructuring programs. Profits will therefore come from savings programs, not from sales growth. The result of 2009 was not bad due to scrapping premiums, but 2010 will be much more difficult.
Using taxpayers’ money in Europe and the USA, scrapping subsidy programs are being implemented, creating the appearance of a positive effect. According to the forecast, in Germany in 2010, the number of new cars sold on the market will fall by about 1 million, to a level of 2.7 million units. Passenger car sales, taking into account all new EU members and Russia, will fall in 2010 to a level of 15.27 million units. In Western Europe, a general decline in sales below 12 million units has been observed for a long time. Russia and England alone, as well as countries without a scrapping premium, will record an increase in sales in 2010. Furthermore, the situation of small and medium-sized suppliers in the industry in Europe in 2010 will remain very difficult, because along with the scrapping premiums, a discount spiral was triggered, for example in Germany, taking into account the scrapping premium, discounts at the level of 58% were recorded.
The article comes from the magazine “Logistyka” No. 5/2010.