Crisis ante portas? Fall of Germany’s car production could send shockwaves in Romania

Recent collapse in German car production raises eyebrows in central and eastern European (CEE) economies, including in Romania, as automotive sector is backbone for many of these countries, Erste Bank Group said in a recent report.

The slowdown of the German economy has been accompanied by a visible collapse in car production.

As of June, German annualized car production plummeted to 4.7 million (about one million less compared to 2015-17 average annual production) and reached a level close to the lows seen in 2009, according to the report.

“The fall in car production – in both speed and magnitude – is strongly reminiscent of the situation in 2009. Should we be concerned that weak car manufacturing numbers provide strong evidence of another looming crisis?” Erster analysts said.

The numbers for car manufacturing in CEE speak for themselves that the automotive sector is the backbone of many CEE economies:

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• About 10% of value added and 6-9% of jobs in these economies could be directly or indirectly linked to car manufacturing.
• Nearly every fourth car newly produced in the EU has been assembled in CEE.
• The region, with annualized production of about 4mn cars, is the second-largest car producer in the EU after Germany.
• CEE car producers and suppliers are an important part of the automotive Global Value Chains (GVC), especially the German one.

However, comparing the current collapse in car production and sales with the situation in 2009, there are two major differences. In 2009, the collapse in car production was clearly the result of negative demand shock resulting from rising unemployment, denting the disposable incomes of households, and a big reversal of the credit impulse, the report points out.

“At the moment, we do not see any of the above happening, suggesting that this collapse is not being fully driven by the economic cycle,” Erste analysts indicate.

The rise of electric cars

Experts points out that the significant changes in the composition of car sales (decline in diesel, increase in electric vehicles) are the second difference that can explain the recent slump in car sales to large extent.

“In the next five years, we can expect substantial shifts in the composition of car production in Europe. During this period, overall demand and production could be temporary dampened by deferred car purchases, as the true era of Battery Electric Vehicles is to start only after 2025,” the analysts estimate.

This could lead to temporary lower GDP trajectory mainly in the Czech Republic, Hungary and Slovakia, according to the report.

Experts say that 10 percent lower car production lowers GDP level by 1 percent in these countries.

“In the meantime, a network of charging stations and battery supply is blossoming across Europe. Lack of battery supply and outages in deliveries has been the main bottleneck in higher production of EVs in Europe,” the experts suggest.

However, the European car producers have committed to invest about EUR 145 billion into electric cars and batteries, according to the Transport & Environment report.

The T&E report indicates that the capacity of battery supply built in Europe (131 GWh) will be enough by 2023, meeting the demand of European car producers. More than half of European battery production is planned to be located in CEE (in Poland and Hungary), Romania being at this moment a blank spot on the map of car battery production.

“CEE countries should quickly benefit from larger investments into electromobility once car producers scale up their EV production and eye on keeping costs down,” the report indicates.

In 2018, Dacia and Ford have produced over 500,000 cars – an all-time high for Romania.

The total passenger car production in Romania reached 263,377 in January-June and could reach a new all-time high this year.