Automakers have ‘no alternative but to shutter plants’

Following the news that Volkswagen Group is planning to temporarily suspend production at its European plants due to the deepening impact of the coronavirus (COVID-19) crisis, David Leggett, Automotive Editor at GlobalData, commented:

“The COVID-19 crisis is impacting car companies in two ways. Firstly, supply chains are being disrupted as critical parts enter short supply. Secondly – and more seriously – demand for new cars is drying up in major markets as consumers face considerable uncertainty over the economic outlook and grapple with new priorities in their daily lives.

“For car companies, the operational costs of running manufacturing plants are considerable. If demand drops off in normal circumstances, they can tweak shift schedules to bring supply into line with a lower rate of sales. However, in response to a large and sudden loss of demand with rates of manufacturing plant capacity utilisation significantly below 50 per cent, they will opt for a more radical course of action – temporary plant shutdowns.

“The shutdowns will put a lid on costs and eventually enable stock reduction when demand picks up, avoiding swollen inventory. Plant managers across all original equipment manufacturers (OEMs) will be closely monitoring order banks and stock levels over the coming weeks. They will want to ensure that they can supply the market with fresh product as soon as demand picks up, but resumptions to production will only come when market conditions allow.

“Much depends on how economies react to the crisis over the next few weeks and also whether government actions and support in response to the crisis can restore already damaged consumer and business confidence.”

At the time of going to press, it seems abundantly clear that if car production goes down OE tyre demand will fall too. The good news is that the tyre market is made up of both OE and aftermarket sales. But the bad news is the social distancing measures implemented by virtually all European governments are likely to impact miles driven figures and, in turn, replacement tyre demand too. The last time something this serious happened to the tyre industry it was the financial crisis a decade or so ago.