German car manufacturer Volkswagen said that following the outbreak of the novel coronavirus the price of key components in cars has seen drastic increases, putting further pressure on profits as the industry finds itself mired in a deep recession. With hundreds of thousands of people out of a job around the world and millions of other facing big insecurities, cars among the key purchases to be postponed.
Stefan Sommer, a Volkswagen board member focused on procurement explained how parts makers, which had to scale down their operations significantly, were passing on their increased expenses. The main reason appears to be that these companies have invested in huge manufacturing facilities, targeted at producing large volumes. Now they are at a point where demand for parts has gone down, but their overheads remain. Hence, prices were being pushed up.
The only compensatory factor is the current oil prices, hovering around historical low.
While Sommer insisted that it would be too early say whether the total cost of producing a car would increase permanently, he hinted that this rise in the value chain would be hard to turn around: ““If we continue to see lower volumes, parts will be more expensive.”
At this point in time, car manufacturers are unlikely to pass on extra costs to consumers in a recession, despite a complete collapse in sale. Italy, the UK and Spain have reported a decline of more than 95% in sales throughout April.
The world’s largest car parts supplier, Bosch, said recently that the car recession is likely to “eclipse the downturn” faced following the international financial crisis of 2008-9.
Today, bosses of the big German companies will be meeting government representatives to push forward the of a scrappage scheme to boost demand. Any such scheme is likely to focus on subsidies for low-emission cars, in particular electric vehicles.
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