Car industry rings recession warning bells

09/30/2024 03:00 PM

Several indicators suggest the new-car industry is facing a downturn, with potentially wider implications for the global economy.

For the second time this year, Volkswagen Group – the parent company of Volkswagen,Audi,Skoda,Cupra, and Porsche, among others – cut its profit forecast, following threats the car giant may be forced to shut down six factories in Germany due to high costs.

According to an investigation by Reuters, car manufacturing plants in Europe were working at lower capacity – dropping to 54 per cent in 2023 from 65 per cent, for those located in higher-cost countries, such as Germany, while those in central and eastern Europe dropped from 83 per cent of utilisation to 79 per cent.

Meanwhile, production output from the world’s largest car maker, Toyota, fell by 11 per cent in August 2024 – marking the seventh straight month of decline from the Japanese company.

Toyota has also been forced to halt production several times this year, after certification issues with the Japanese Government, as well as a disruptive typhoon in August – which also affected Honda,Mazda, and Nissan.

However, one month earlier, Nissan revealed its operating profit had collapsed by 99 per cent – with the company barely remaining in the black, with just 995 million Japanese Yen ($AU10.1 million) on hand, Yahoo Finance reports.

At the same time, Stellantis – the parent company of 15 car brands including Alfa Romeo, Citroen, Fiat, Jeep, Maserati, Peugeot, and Ram – announced net profit for the first half of the year had almost halved to €5.6 billion ($AU9 billion) after sales fell by 14 per cent, according to The Guardian.

In September 2024, economist and former Italian Prime Minister Mario Draghi released The future of European competitiveness report, which claimed the European Union was facing slow economic growth in the face of increased competition from the US and China.

The report also said “China’s state-sponsored competition also represents a threat to [the EU] … automotive industries,” which employ 14 million Europeans.

While sales continue to grow in Australia, demand for electric vehicles is falling in many major markets – including the European Union, where officials are calling for “urgent relief measures” following a drop in sales of 45 per cent in August.

Sales of electric and plug-in hybrid models in China also continue to tick up, despite the overall passenger vehicle market declining 1.1 per year-on-year in August, following a 3.1 per cent drop in July, according to Reuters.

By September, new-car sales in China had dropped by 5.5 per cent – marking the sixth straight month of decline – with production also dropping by 3.2 per cent, the China Association of Automobile Manufacturers reports.

As reported by Drive in September 2023, several car makers had been positioning themselves for an economic storm.

“The economic environment is going to get tough next year (2024), with inflation and interest rates at the current levels and a recession threat in of the biggest European markets,” Cupra CEO Wayne Griffiths said at the time.

During the same period, Ford secured itself a $US9.2 billion loan ($AU14.3 billion) from the US Government, just months after CFO John Lawler warned about a potential “mild recession in the US, and a moderate recession in Europe”.

While the loan was granted to build new electric vehicle factories and battery plants – not a taxpayer-funded bailout – financial commentators speculated that Ford may have been taking advantage of government funds to ensure it could use its own cash to shield itself from economic headwinds.

While General Motors and Chrysler required government bailouts during the Global Financial Crisis (GFC) of 2007 and 2008, Ford had already secured loans to help it avoid bankruptcy.

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