Will the car industry, which is addicted to short-time work, be able to stall without damage?

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The end of the "whatever it takes" that is now in place in France is causing great concern and some other states are reluctant to dry up the funding of their short-time working schemes. In view of the automotive situation, these fears seem justified: it was very necessary to adopt these measures and it is now urgent to abandon them. However, we must be aware of the risk of seeing the painful issue of overcapacity reappear following these abandonments. The financing of short-time work allows manufacturers to live in a very artificial under-capacity situation: the return to normal is taking place.

Short-time working is a hard macroeconomic drug from which it will be difficult to withdraw. There has been much praise for the fact that the example set by the Germans during the previous crisis has been followed by most European countries in the face of Covid 19, and we were right: for companies as for the economy as a whole, preserving jobs and salaries when production must cease because it can no longer be assured and/or sold, makes it possible to avoid disaster and gives us a much greater capacity for recovery than if we had allowed the destruction of jobs and companies to take place.

There is a consensus in Europe for the time being on the need to accept a large increase in public debt in order to make this possible, and the continuation of the expansionary monetary policy initiated by Mario Draghi almost 10 years ago makes these debts sustainable by ensuring that the interest rate remains below the growth rate.

Nevertheless, for almost a year now, the question of how to get out of this support for activity without too much damage has been raised and everyone seems to be paralysed by this prospect. In January, Le Monde reported that a study by the European Central Bank was trying to assess the effectiveness of these measures by asking itself
i) did it help preserve employment, with the partially unemployed returning to work once the crisis was over?
ii) are we creating subsidised jobs that no longer make economic sense?

In July, the daily explained that "across Europe, the schemes put in place since the start of the Covid-19 health crisis are being scrapped or made less generous" and that this risked "provoking a sudden rise in redundancies". The journalists added that "governments seem aware of the danger". And, in fact, although in France the end of the "whatever it takes" policy was officially decreed at the beginning of this month, the government is already planning some exceptions.

Elsewhere, in Germany and Spain for example, the scheme has been extended: the fear of breaking the recovery that is taking shape by causing the unemployment of people whose jobs would no longer have an "economic raison d'être" is the strongest.

In the automotive sector, this "return to normal" will have to be carried out in an extremely particular context marked by the impossibility of producing a share (around 10%) of what we would like, by very serious doubts about the level of demand and by equally serious uncertainties about the mix and, in particular, the energy mix.

For the time being, even when one does not have much to produce in one's factory, one is paid: this was the case almost everywhere in Europe and it seems that if France reduces its support earlier than Germany, for example, a manufacturer like Stellantis will not hesitate to optimise by having its German employees in Eisenach paid by taxpayers in order to make the French people work more, as Bercy no longer wants to pay them when they stay at home.

The shortage of semi-conductors would justify the three-month closure of the site that produces the Grandland X SUV. It is also the return of an issue that has been forgotten for 18 months, that of overcapacity.

It will be remembered that during the crisis of 2008, this was an obsession in the European car industry and that some of the big names, such as Marchionne, made the United States and the "great clean-up" that had been carried out there a benchmark by closing 11 assembly sites.

At Stellantis, which has to manage the three industrial tools of the historic PSA, Opel-Vauxhall and Fiat in Europe, this question will have a hard time being solved by the gains in market share of the brands in commercial disarray like Opel or Fiat: once the short-time working has disappeared, when it will be necessary to pay all the permanent employees in all the factories, as we can see with this transfer of the hot potato between Eisenach and Sochaux, the management of Stellantis will not be able to ignore the question.

Obviously, for Stellantis as for Renault and the other large generalist constructors, this question of overcapacity which the end of assembly at Flins was intended to help deal with will be all the more problematic as the level of demand in Europe will be low.

Here the diagnosis is very difficult to make because the signs given are contradictory. The fact that there is a shortage of semi-conductors and that 7 to 10 million vehicles will not have been assembled by the global automotive industry by the end of the year gives the impression that demand is there and that manufacturers are essentially struggling with this bottleneck.

At the same time, analyses of the German and French markets in September point to a more structural slump that can be partly explained by the development of wait-and-see behaviour linked to electrification: electric vehicles remain expensive and do not offer quite the same services, while other technologies are devalued and, for this reason, despite significant forced savings by households and comfortable margins in many companies, demand is sluggish.

We can also risk a third interpretation which couples the semi-conductor crisis and short-time working and which underlines that this very unlikely conjunction of factors has put the automobile industry in a situation where it has, for once, to manage an under-capacity situation. Thus, while usually factories systematically produce volumes for which there are no customers yet and for which it will be necessary to ask the trade for work and discounts, for almost two years the industry has been able to afford not to produce and/or to produce only those components of the range that are profitable by allocating assembly hours and semi-conductors to them.

Typically, this year, according to what Eric Champarnaud told Le Monde, about 1.7 million cars will be sold. This is 300,000 to 400,000 cars less than usual and it corresponds to the fact that, as we saw during the presentations of the half-yearly results of Renault and Stellantis, each company favours its margins or its "pricing power" and does not oblige its trade to go and get these sales with its teeth. Stocks are low. Sales to hire companies and other "tactics" are not very dynamic. Discounts are contained. In short, the usual commercial anabolic agents are not used. We are satisfied with "normal" demand. This is what is actually abnormal.

The landing that is being prepared and that the public authorities are managing with care will not fail to remind everyone in the weeks and months to come that the transfer of the burden of adjustment to taxpayers cannot last. The time is coming when industrialists will once again be responsible for their production plans in the eyes of employees, suppliers and traders.

All those who, on the basis of what happened in 2020-2021, thought they could develop their strategies will probably have to pay the price. Typically, the "pricing power" that Renault thought it had acquired in the first half of the year probably owed a lot to the ability of the management not to make the French and Spanish factories work some weeks.

In a similar way, the desire of the management of Stellantis to redefine the respective roles of the head office and the distributors in the vehicle trade in order to limit the weight and remuneration of the latter may also correspond to the rather crazy hope of perpetuating in the years to come a situation where one can afford to let the customer come.

11/10/2021
 

The weekly column by Bernard Jullien is also on www.autoactu.com.

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