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Covid-19 crisis in the automotive sector

Covid-19 crisis in the automotive sector

“The Covid-19 crisis will cut deep into the automotive sector”, expects Frank Vancamp, the Flemish mobility expert at KPMG. "The car market is not going to have an easy period. The recovery may only come after two years, or even later". 

Every year, KPMG interviews sector experts in the global automotive industry. The Global Automotive Executive Survey is normally presented early in the year, but this time there was a delay. This year the study focuses almost entirely on the consequences of the Covid-19 crisis. "Car sales are very cyclical. There are many possible economic scenarios, but most of the projections are assuming a strong economic downturn", says Frank Vancamp.

 

The study indicates that consumers are afraid and avoiding public transport. Could that boost car sales? 

FRANK VANCAMP. "For years, governments encouraged citizens to use public transport more often. With the Covid-19 crisis, they were forced to change their approach. The use of public transport was even discouraged, although this trend is now somewhat behind us. For the consumer, there’s still a great temptation to see the car as a safe environment. But there is also a large increase in remote working. The number of people who continue to move to-and-from the office every day will fundamentally decrease".

The market leader, D'Ieteren Group, the importer of Volkswagen Group (Audi, Porsche, Skoda, Volkswagen), expects this year's increase in remote working to reduce sales of new cars by 21 percent, to 435,000 units.

VANCAMP. "There are already fewer movements in the market. More and more companies want to extend their car leasing contracts. More than half of new car registrations in Belgium are company cars. If that movement slows down, for example by extending leasing contracts, it will have an impact on sales. That’s on top of the general impact of the Covid-19 crisis. It’s also very possible that many companies will undergo a restructuring process in the coming months. That means fewer staff, and therefore fewer company cars. Febiac and Traxio's forecasts are even worse. Sales of new cars are expected to fall by a fifth or even a third. Fewer sales mean more competition between car dealers, lower margins, and so on".

Leasing companies are also seeing the residual value of cars evaporate due to the threat of oversupply.

VANCAMP. "If sales of new cars are under pressure, the second-hand market will also be affected. This can have an impact on the estimates calculated by leasing companies in terms of the residual value of the cars. If the supply in the second-hand market increases, there may be losses on residual value".

What will be the impact of declining sales on Audi Brussels and Volvo Gent?

VANCAMP. "Those two factories have potential. There is a negative impact on car sales, but that should not be the case with car production. According to our research, the long-term trend towards lowering the environmental impact of cars will continue even after the Covid-19 crisis. Audi Vorst and Volvo Gent are fully committed to sustainable technology and governments also want to stimulate the use of ‘greener’ cars".

Diesel and petrol engines will still be around in 2030, but they will no longer dominate the market.

VANCAMP. "What will become the decisive propulsion system will depend mainly on the raw materials a country has access to for energy. You also need raw materials for electric cars and batteries. Moreover, you have to provide the necessary infrastructure. Belgium is an ideal country for electric charging infrastructure: small and densely populated. The technology of the all-electric car is also getting better and better, but it is not yet fully developed. As long as large volumes are not achieved, prices will remain relatively high".

This explains the boom in hybrid cars.

VANCAMP. "In the first months of this year, hybrid cars accounted for no less than a quarter of all newly registered cars. It's psychologically very important for the driver that the car doesn't come to a standstill when the battery is depleted. Then you just switch to a classic internal combustion engine."

The breakthrough of all-electric cars is also highly dependent on subsidy policy.

VANCAMP. "Subsidies come under pressure due to high government spending. The Covid-19 crisis reinforces this trend. So the outlook is not good. Governments have other priorities. For the time being, the Flemish government has suspended the demand for a premium system for the purchase of an electric car. For the Flemish government, it is not only the environmental issue that is important, but also general mobility. Replacing an ordinary car with an electric car does not solve traffic jams".

However, the investor continues to enjoy the enormous potential of electric cars. On 1 July, Tesla became the largest car group in the world, overtaking Toyota in terms of stock market value.

VANCAMP. "In our study, BMW is in first place as a producer of electric cars. Tesla is second, Toyota is third. Tesla has a very nice image, but it only produces a fraction of what Toyota achieves. You have to look at things in the right perspective."

Among consumers, Tesla is at the forefront. Why the difference in perception between the car managers interviewed by KPMG and the general public?

VANCAMP. "Car managers assume that the all-electric car does not yet offer the right solution for every situation and for every consumer. In addition to electric cars, the major classic car manufacturers also offer other variations of propulsion systems: hybrid, CNG, internal combustion engines. Their range is much wider.

"Car tax could increase significantly"

Frank Vancamp is also a specialist in car taxation. The situation in Belgium worries him. From 2021 onwards, car taxation will be calculated on the basis of new emission standards (WLTP). According to forecasts, this will cause car taxes to rise by an average of one fifth. "The fiscal landscape in Belgium is very fragmented. There are the classic taxes at federal level. Then there are the regional taxes, which differ from region to region. If you want to neutralise the impact of the WLTP fiscally, you will have to adjust it at various levels, and this situation is still unclear. In its coalition agreement, the Flemish government stated that the transition to WLTP would take place, and that its impact should be broadly neutral. Globally, nothing has been said about individual car makes and models. Even for modest cars, there is sometimes a significant increase in the tax bill, but not necessarily for larger cars. At the federal level, it is not yet clear what will happen, even though this is important for corporate and personal income tax. The emission standards are not a fiscal recourse either. While the European Commission introduced them, it did not in any way intend for this to lead to a tax increase. In the first instance, the WLTP standards must provide correct information about the emissions of the cars. But the consequences are fiscal, because the emissions are often the basis for fiscal calculations".

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