Countermeasures of the German Government during the COVID crisis – what impact for the automotive sector? (Part 1)

Starting in July 2020, the German Government introduced a range of new measures to kick start the economy and to be in a good position to realign with future needs – all detailed in the “Konjunktur- und Krisenbewältigungspaket”, with mainly a short-term focus on supporting liquidity and avoiding job losses, and in the “Zukunftspaket” which is more long-term orientated and aims at securing technological power as well as successful (ecological) transformation - for instance as in the mobility sector.  The automotive industry is at the core of Germany’s economy, but still has disconnected delivery chains, production at below normal capacity and low sales, both short- and long-term measures highly affect the players of the sector across the value chain, and many of the detailed actions only address specific needs.  However, many question how the Government’s intervention will pan out.

This blog is the first of two and aims at highlighting and discussing a selection of the Government’s measures covered in the “Konjunktur- und Krisenbewältigungspaket” from an automotive perspective.

One of the most important measures of the “Konjunktur- und Krisenbewältigungspaket” was to increase short-term working benefits for up to 12 months (currently under discussion to be extended) which helped the whole automotive value chain through from small suppliers or dealers to OEMs thus avoiding exceptionally high job losses.  Apart from the probable effects on society and the economy such as the need for higher social aid, it fulfils - from a company perspective - an important basic prerequisite: when demand gradually normalises to pre-crisis levels post-lockdown, dealers, suppliers, OEMs and service providers will be ready to fulfil orders and services with a qualified workforce which they have been able to secure through lockdown.

To stabilise the economy and to support especially the smaller companies, financial interim aid (besides support from OEMs for their networks) is being provided for 3 months, which is required to maintain the continuing liquidity of the business.  However, there are downsides to the measures, apart from the obvious one of worrying how long it will last.  The pace of putting everything in place must be quick and uncomplicated, which reportedly has not been the case so far and also, it is temporarily bolstering some companies which were already close to market exit pre-Covid and will not make it regardless.  The measure is also exposed to fraud – albeit we have no knowledge of this happening in the automotive industry so far – perhaps this is impossible to avoid completely.

The Government has also introduced a temporary decrease in VAT down from 19% to 16% and respectively from 9% to 7% - this started on 1st July 2020 and will end on 31st December 2020.  The former rates are in general applicable to buying or servicing a car, subject to the delivery or service date being in that timeframe.  However, when many people are on short-term employment, and dealers are arguably trying to secure some of the decreased VAT in return for their losses in the month before, will this measure – whether standalone or in combination with others –  really have a sustainably accelerating effect on sales?  One could argue that this is unlikely as it brings much administrative effort and will have an effect on customer buying behaviour.  On the one hand, those who bought a car before July will understandably want to benefit from the VAT decrease too and are now in negotiation with their dealers.  On the other hand, others that are less affected by COVID-19 and planned to buy in 2021 might now bring forward their purchase to before the end of the year which will lead to distorting the car market.  

Besides the key areas discussed, many smaller actions have been put in place, which possibly taken together will have a gradual positive effect on the industry.  These include the stabilisation of employer social insurance contributions to a maximum of 40% to 2021, subsidies to energy prices, depreciation and tax advantages (the latter of interest to those considering investment in new technologies or diversification into different business areas).

However, whether the “Konjunktur- und Krisenbewältigungspaket” is really stimulating the economy sufficiently is debatable.  Recent data from GFK suggest that the German consumption climate has only increased gradually and is even expected to decline again in September[1].  Car sales in July saw a further increase since the end of the lockdown but are still behind y-o-y[2],  and even though the situation has improved, dealers are still struggling to earn money under the pre-Covid margin system which most brands have not amended.  A positive improvement is that digitalisation at all levels has been accelerated, with early indications showing positive lasting effects.

To conclude, at least for the automotive industry, it looks like Olaf Schultz’ (Federal Minister of Finance) hope for an “explosive” turnaround (“Wir wollen mit Wumms aus der Krise”[3]) has not become reality yet.  It seems like they have a “life-sustaining” effect rather than strongly reaccelerating consumption and the economy which possibly could have worked out more positively with more extreme measures.

The second and final part of this blog series will provide a view on the “Zukunftspaket” of the German Government, again from an automotive perspective.

[1] https://www.gfk.com/de/presse/Konsumklima-Erholung-vorerst-gestoppt?hsLang=de

[2]https://www.kba.de/DE/Presse/Pressemitteilungen/2020/Fahrzeugzulassungen/pm18_2020_n_07_20_pm_komplett.html?nn=646300

[3] Video of Olaf Schultz’ speech from 3rd June: https://www.bundesregierung.de/breg-de/themen/coronavirus/-wir-wollen-mit-wumms-aus-der-krise-kommen--1757510