A slowdown in production and demand in the automotive industry will have a huge impact on EU jobs and the entire automotive supply chain. CFOs and corporate treasurers will be under pressure to assure liquidity and strong balance sheets in order to gain new projects. Producers of complementary parts for combustion engines might reconsider their strategies as the demand for APVs throughout the EU is picking up quickly. Recently, the automotive industry in Europe and Northern America has become plagued with risk levels of the construction industry.
According to the European Commission, the automotive industry represents over 7% of the EU GDP and – directly and indirectly – employs 13.8 million Europeans which translates to 6.1% of the total EU employment. If we break down the 13.8 million jobs into job sectors, 3.5 million are assigned to direct and indirect manufacturing, 4.5 million jobs in sales and maintenance and 5.1 million jobs are assigned to transport.
Looking at the ACEA – European Automobile Manufacturers Associations – 2019 half-year report, the reader comes across quite some worrying data. When analyzing the demand, we can observe that the demand for new cars in Europe fell by 3.1% compared to the year before. The demand only grew in Central Europe (1.4%), while demand in other regions had declined. Observing the 6-month production in the EU, car producers reported a contraction of 6.2% which translates to 600.000 vehicles less produced. Production output fell in Germany, the UK, Italy, Poland, and Spain. In general, we can see a serious slowdown.
Falling demand and weaker production will definitely have an impact on the entire automotive supply chain. The first impact comes as a decrease in orders to the OEMs (original equipment manufacturers). Additionally, a fiercer competition is expected for future projects, where car producers will be very cautious when choosing the right suppliers – reviewing their financial health and reliability. Secondly, a falling demand may cause payment delays throughout the entire supply chain, implying an elevated credit risk down the chain. CFOs and corporate treasurers will have challenges assuring liquidity on one hand, and providing strong balance sheets on the other, in order to land new projects as the automotive industry obtained a high-risk level around the entire globe. In Europe, Northern America and Latin America, it is considered as risky as the construction industry.
Tracking the trends in the automotive industry, we can observe that there is a constant increase in demand for alternatively-powered vehicles or APVs that comes on the top of the current weakness described above. According to ACEA, the demand for APVs in the first half of 2019 grew by 27% compared to the previous year. That being the case, producers of complementary parts for internal combustion engines might be faced with more substantial challenges than just from the current slowdown.
This article summary was written by Aljaž, Risk manager at Alpha Credo.
Sources:
The European Commission (2019). Internal Market, Industry, Entrepreneurship and SMEs – Automotive Industry. Available here
ACEA (2019). Economic and Market Report: state of the EU auto industry – First half of 2019. Available here