James Norris, Senior Analyst

09 June 2020

COVID-19: Europe’s auto industry restarts, but the road to recovery is long

Despite several large plants remaining idle, Europe’s auto industry is slowly emerging from a lengthy shutdown period. Having closed for an average of 6-7 weeks, plants are restarting as governments ease COVID-19 lockdown measures and manufacturers introduce new hygiene and social distancing processes. Although this is welcome news, opening factory doors is just the first step in the industry’s journey to recovery, and a return to pre-pandemic production rates will take far longer than it took for them to crash.

Within two weeks of the first Italian plant closure on 11 March, European Light Vehicle output ground to a halt in the Big 5 markets and, by the start of April, pan-European capacity had plummeted by 95%. Towards the end of April, a limited number of auto plants resumed production at vastly diminished rates. Constrained by new manufacturing procedures, supply chain disruptions and virtually non-existent demand, OEMs began by only building specific models, using fewer workers on reduced shifts. By the end of May, pan-European capacity was close to pre-pandemic levels, but utilisation remained low. Improving build capabilities in the coming months will hinge on three interdependent factors: relaxing remaining lockdown measures, allowing employees to return to work (and their willingness to return), and safely unwinding social distancing practices at plants.

Nor should the importance of increasing vehicle sales be understated. Although higher output was an option, Volkswagen reduced production volumes shortly after reopening its Wolfsburg plant, due to low demand. FCA also curbed manufacturing to stop inventories from swelling – after all, there is little point in building vehicles that cannot be sold. Amid all the gloom, however, there is room for optimism with the French (US$8.8 billion) and German (US$5.6 billion) governments announcing large industry aid packages, including incentives to boost vehicle demand.

Unwinding the preventative measures without provoking a higher-than-anticipated second virus outbreak will be a lengthy process, with governments, automakers and employees all likely to err on the side of caution. The recovery in vehicle demand will also be drawn out, due to the pandemic’s deep and enduring impact on the economy, which is expected to take several years to return to pre-COVID-19 levels. The recovery in production is set to be gradual and not necessarily linear. Given the uncertainty of the current situation and that forecast risks largely skew to the downside, pan-European Light Vehicle output is projected to fall by around 24% in 2020, with last year’s volumes unlikely to be surpassed until 2023.