Most industrial sectors will find the pandemic and its aftermath difficult to handle but car manufacturers should be particularly challenged. Most industrial sectors will find the pandemic and its aftermath difficult to handle but car manufacturers should be particularly challenged.
One of the reasons is that they were not looking good in the first place, and this in spite of the continuous growth of the global market. Until COVID-19, the two main difficulties were a crowded offer and the painful transition to cleaner transport technologies.
The number of players is an underlying weakness of the automotive sector. While profitability is driven by economies of scale (or more accurately experience curves) and hence the market is increasingly global, many zombie manufacturers remain in the game even though they are bleeding money. The main reason for this is their white elephant status. No government can let go of them. Even the White House had to bail them out during the subprime crisis, and the iron(ic?) Margaret Thatcher had to reluctantly waste public money in her time. Not only do they represent a substantial industrial force, but there is also a long history and a love affair between the voters and the brands.
Because of this, mergers & acquisitions are slow and difficult, complicated since governments are often shareholders and always stakeholders, and as a result these belated, often under pressure ventures sometimes fail conspicuously (Daimler Chrysler). Companies have to resort to “alliances” to uphold their fading identity, not unlike Middle Ages baronies. Coopetition agreements discreetly enable constructors to develop an engine, a technology or even a vehicle together at shared costs. In such a sick market, even leaders are vulnerable, as Toyota and Volkswagen’s troubles have made plain.
Even more ominous, the transition to a decarbonized economy seems to be kryptonite for already weakened players. Only oil producers drag their feet more (at least they are claiming to move to renewables).
Electric vehicles should have looked like the solution for at least a handful of zombie manufacturers. Too big to fold but too small to breathe, these companies could have jettisoned the thermal business and gone full electric, hoping to lead the experience curve. Like any business in the first steps of the product life cycle, they should opt to lose money so as to buy market share, then lead and dominate the market once it has flipped, like flat-screen TV sets did a couple of decades ago.
They did not. They actually did the opposite. They waited for so long that it allowed an outsider, Tesla, to enter the game (and others, such as Dyson or Google, started working on it). When they developed vehicles, the main goal appeared to be to keep the market undisturbed. Renault’s flagship electric car, the Zoe, costs more than its thermal equivalent even without the batteries. Only when government subsidies are deducted does it become kind of competitive. As electric vehicles should be cheaper to produce (batteries excluded), this raises eyebrows and suggests that the objective is to limit the damage to the existing product mix and make as much money as possible from taxpayers. Others focus on hybrid vehicles, which are nothing but a green crutch for plain vanilla thermal vehicles.
Earthquakes do not happen because the ground is moving. Tectonic plates move very slowly. Earthquakes are caused by the ground not moving for a long time, the pressure building up, and being suddenly released. This is what businesses sometimes do, and probably what will happen to the automotive sector, triggered but not caused by the pandemic.
While car manufacturers prepared for the electric transition but did not really move, customers and planners did not stay idle. The decarbonization of the economy is happening, with or without industrial behemoths, silver-tongued politicians or clueless governments. When people were told to wait for electric cars to become competitive, they did. They kept their cars instead of replacing them. Then they started biking, taking the bus and the train, sharing rides or vehicles with the help of new apps, and now massively learn to work and shop from home. Cities started to organize new transport options and to ban cars. Planning agencies already anticipate a future where cars have much less place.
So, sales dropped (or in emerging markets, did not rise as fast as expected) and the players that could have invested in the electric future now find themselves in an even worse financial position to fund the move.
Of course, this would be difficult for anyone. After more than a century of thermal vehicles, and with all the uncertainty on batteries, caution is advised. But for some automotive companies, caution is like staying in a house on fire for fear of the outside (admittedly with a firefighting suit courtesy of taxpayers). At least the pandemic provides a good excuse for a last push from governments.