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The Great Recession vs The Corona Crash

Part 1: The Automotive Industry in the US and Germany

Parts of the current crisis feel awfully familiar, while other aspects are entirely unprecedented. The level of familiarity all depends on where one looks. This series investigates five different industries around the world to show the similarities and differences between the Great Recession and the Corona Crash. While our Corona data is inherently limited, we can still draw conclusions based on Great Recession data about where it may go in the future. This week, we are examining the automotive industry in the United States and Germany.

A Tale of Two Crises

The following graph shows total vehicle sales in the United States between 2007 and 2020.

Similarities

  • In both 2008 and 2020, total vehicle sales never fell below 9 million units.
  • Before both crises, vehicle sales were stable, and the onset of each crisis caused an immediate crash.
  • In both cases, vehicle sales rebounded.

Differences

  • In 2008, vehicle sales declined sharply and continued on a downward trajectory for several years. At the low point, vehicle sales were only 60% of pre-crisis levels. In 2020, sales fell off an immediate cliff, dropping almost 50% within a few short months.
  • Likewise, the market rebounds differ in terms of speed. After the Great Recession, sales crept up slowly, only reaching pre-recession levels in 2014, 6 years after the start of the crisis. Yet in 2020, sales reached pre-recession levels a mere 6 months after the onset of the crisis.

Conclusions

Despite the rapid 2020 rebound, automakers are not optimistic. They remember how hard they had to claw their way back to pre-crisis sales figures, and many manufacturers did not survive. Furthermore, they are taking current auto sales with a grain of salt, primarily because they believe that current sales are inflated due to several months of pent-up demand. Once sales regress to the mean, they expect that mean to be much lower than it currently is. After 2008, automakers took steps to protect themselves from future crises, mainly via increased cash reserves and liquidity, as well as established credit lines should they need them.

Das Auto

The fate of the American automobile industry gains context when compared to one of its major competitors: the German automobile industry. Germany’s industry emerged very quickly from the Great Recession, mostly because of exports. By 2010, Germany had increased its exports to 20% higher than its record-best sales figures.[1]

Mainly, it saw increases in exports to both the US and China, as well as a domestic increase in production.

Due to COVID-19, the Europe-wide passenger car market fell 43 per cent in January-June 2020, compared with 23 per cent in the US and 27 per cent in China.[2] Production within Germany fell 40 per cent year-over-year to its lowest level in 45 years, and, most importantly, exports also fell at the same pace. Although its numbers in places like China are still strong, it seems that exports will not be the divine intervention that they were in 2008. The automobile market represents 5% of Germany’s GDP (unlike only 2.7% in the US), so there can be cascading economic effects if the current rebound does not persist. The slight recovery that we have seen in the fall will not make up for the severe losses suffered earlier in the year.

The Luxury Lag

A little over a year ago (which seems like a decade ago), there were rumblings of a potential recession, particularly in the auto industry. Globally, automakers began to worry about several ominous indicators, and rightly so, because they remembered the trials and tribulations that followed the Great Recession. According to interviews published in an ABC News article from August of 2019, “All luxury automakers suffered in the last recession… Luxury cars are discretionary purchases. They’re the first things people stop buying. No one needs one.”[3]

This statement is logical: if people have less disposable income, they are far less likely to spend it on something they do not necessarily need. But what about the people who can still afford one? Well, other factors are holding them back. Jim O’Donnell, the CEO of BMW North America, said in 2009, “I think some people can still afford it, but when you’re a CEO of a company, and you’re laying people off, do you want to be seen driving a new 7-Series?” His 2009 logic is still sound today, maybe even more so because of the nature of this crisis. So many people are suffering — physically, mentally, financially — that exhibiting any sign of success can be seen as gauche and insensitive.

Government Intervention

There is still very little actionable data about how the luxury car market is doing 2020. That said, the Great Recession may give us a few hints about what might happen, and it all has to do with how governments intervene. In 2008 and 2009, governments around the world helped finance “scrapping” incentives, which encouraged people to trade in their cars for inflated, government-back prices so they could buy new vehicles. This government intervention helped overall car sales from crashing as hard as they otherwise would have, but, importantly, it skewed heavily toward low-margin, mass-market car models. The premium automobile market — which operates on a heavy investment, high-margin model — was not the intended or effective beneficiary of this government intervention.

Back in 2008, the United States government stepped in and bailed out many of the nation’s largest companies, including General Motors and Chrysler. We do not yet know if there will be bailouts this time around, nor do we know what form they will take. Over in Europe, several governments have pledged to help automakers via loans, direct payments, or even nationalisation, if necessary. Since the Great Recession, governments have grown decidedly more populist. Therefore, we have no reason to believe that government intervention will change, so it will again be skewed toward the mass market. The entire automobile industry is facing an uphill battle, but the luxury market’s climb will be especially steep.

 


[1] Bai, Xue, “The Effects of the 2007-2009 Economic Crisis on Global Automobile Industry” (2012). Applied Economics Theses. Paper 2.

[2] https://www.dw.com/en/eu-car-sales-sink-to-record-low-levels/a-53491028

[3] https://www.nbcnews.com/id/wbna32860931