Written by Shayna Korsh
Since the onset of the COVID-19 pandemic, automobile manufacturers have suffered from losses in sales. The automobile industry accounts for 3% of global economic output, and in some countries that percentage is much higher (Ewing and Cohen). Recessions can often take years to recover, especially in heavily impacted industries such as auto manufacturing. In order to grasp the extent that the current recession is impacting the entire world economy, an understanding of the automobile industry is necessary.
Automobiles are a durable, normal good. This means that they can be used for a long time and are typically replaced when a consumer’s available spending income is high. During a recession, consumer spending money is often constrained, so they push off their potential purchase of a brand new car until a later date. This can have a drastic impact on automobile producers, especially when they face an unanticipated negative demand shock. Companies are unable to sell the cars that they have already built, and this results in a loss in profits that may have been used to pay for some of the firm’s production costs.
While a reduction in the demand for automobiles is not uncharacteristic during a recession, this particular COVID-19 recession is different due to supply chain shortages. For example, “Carmakers are also scrounging for the type of plastic used to hold windshield wiper fluid and mold the dashboard as well as the foam used to construct seats” (Ewing and Cohen). A price hike in raw materials is also preventing automobile manufacturers from producing enough vehicles to sustain the remaining market demand despite the recession. “In Japan, home of Toyota and Nissan, parts shortages caused exports to fall by 46% in September compared with a year earlier–a potent demonstration of the car industry’s importance to the economy” (Ewing and Cohen).
Though automobiles are durable goods, consumption (or the purchasing of a vehicle) can only be delayed if a consumer’s current car doesn’t urgently need a replacement. Automobiles are ultimately essential for transportation and for moving goods, so they will eventually need to be purchased. A lack of supply can therefore have a deep economic impact on the movement of goods. Martin Daum, the head of Daimler, a producer of Mercedes-Benz cars, said that “We are basically sold out in Western Europe and North America until next year.” While the automobile industry is normally burdened by excess supply during a recession, it currently can’t produce enough cars.
Car manufacturing requires significant fixed costs due to product research and development. It also may be extremely costly for a firm to gather all of the raw materials necessary to produce its cars. As an economy of scale, production is most efficient when a firm produces as much of its product as possible–this way it can sell more of its product and earn back more profits, helping to cover their costs. However, when a firm produces less during a recession, these fixed costs can become burdensome, often forcing companies to lay off some of their employees to reduce its costs.
Communities depend on automobile manufacturers as a larger provider of jobs, so a recession can directly result in job loss for automobile company employees, as well as in input industries such as rubber or steel. To try to prevent layoffs within the industry, carmakers such as Ford and General Motors are raising the prices of their cars (Ewing and Cohen). This will allow them to potentially collect more profits, using the money to keep its employees on its payroll. For Daimler, the company actually saw its net profits increase even though it sold less vehicles due to a higher sticker price.
Failure within the automobile industry can have a ripple effect towards other industries as well. Car makers are major consumers of steel and plastic, so these industries will also take a hit. Additionally, if automobile companies are forced to go bankrupt due to a significant loss in profits, thousands of its workers will be unemployed. This means that the restaurants and grocery stores that feed these auto workers will also be impacted (Ewing and Cohen). Due to its size and scope, the automobile industry is very interconnected with other industries, and its failure could be a fatal blow to the economy. As the COVID-19 pandemic persists and supply shortages continue to plague the automobile manufacturing industry, government bailouts of major automobile companies may be necessary to avoid a potential economic collapse.
Works Cited
Ewing, Jack, and Patricia Cohen. “How Car Shortages Are Putting the World’s Economy at Risk.” The New York Times, The New York Times, 2 Nov. 2021, https://www.nytimes.com/2021/11/02/business/car-shortage-global-economy.html.