Manufacturing in Europe has suffered a major blow as a result of Covid-19. Demand slumped, workers fell ill, and national lockdowns rattled supply chains. How will sectors that make up key parts of the economy in many European markets, including aerospace, automotive, food and pharma, recover long term? Maddy White investigates.
In April 2020, industrial production in the EU fell by 27.2% compared with the same month the previous year, an annual decrease exceeding the drop recorded during the 2008/09 global financial crisis by seven percentage points, according to Eurostat, the statistical office of the EU. It was a decline, in fact, to levels last seen in the mid-1990s.
While lockdowns and travel restrictions triggered a deep and immediate shock for manufacturing, the situation is beginning to improve, albeit at a slow pace. In May, when Covid-19 containment measures were starting to ease, production in the EU rose by 11.4% compared with April, mostly driven by a surge in production of durable consumer goods such as cars and fridges. The largest increases were recorded in Italy, France and Slovakia, where automotive plants were beginning to reopen.
Despite this progress, however, the outlook remains dismal compared with May 2019. With production still down by 20.5% year-on-year, the monthly increase in production is far from offsetting the shock caused by the pandemic.
“As lockdown restrictions were eased, industry rose modestly in May,” Stephen Foreman, lead industry economist at Oxford Economics, tells GTR. “However, the recovery is likely to be uneven. Economies less affected by the pandemic, such as Austria, will recover more quickly than hard-hit countries such as Italy and Spain.”
When it comes to recovery by sector, Foreman adds that essential goods such as food products and pharmaceuticals will be among the first to rebound. By contrast, eurozone aerospace manufacturing will experience a more sluggish improvement.
Aerospace and automotive
Covid-19 has caused a collapse in demand for the aerospace and automotive sectors, with their recovery hinging on different factors. “Aerospace is very much impacted by overall consumer demand, and the crisis. But automotive is undergoing a technological shift that is fundamental, and it still has a long way to go to recover its reputation after the diesel scandals,” Rebecca Harding, independent economist and CEO of trade data company Coriolis Technologies, tells GTR.
No doubt, the aviation industry will bear the brunt of the crisis years into the future. European aerospace giant Airbus revealed in June that it would cut more than 12,700 jobs across Europe, including over 5,000 apiece in Germany and France, to safeguard the company’s future.
“With a loss of 40% of our commercial aircraft business we have had to reduce production rates to synchronise with new market realities,” an Airbus spokesperson tells GTR. The company is decreasing the number of single aisle A320s (its most popular plane) it manufactures in a month from 60 to 40, and the number of widebody A350 planes from about 10 to six in the wake of the pandemic.
“We expect single aisle traffic to return first, but we do not expect the pre-crisis level of traffic (single aisle and widebody) to return before three to five years at best. So, we’ve taken the tough decision to launch an adaptation plan to protect the company for the future,” they add.
Covid-19 has rattled aerospace supply chains across Europe. Airbus says it is working closely with its suppliers to manage the situation and to mitigate the impact of the pandemic on these smaller businesses, whose liquidity levels are likely to suffer as large firms slash production.
Jason Aldridge, managing director of Arrowsmith Engineering, a UK-based supplier of engine parts to Rolls-Royce, says that the firm was forced to remove big overheads as soon as the outbreak happened, calling the UK government’s Coronavirus Job Retention Scheme a “lifesaver”. “This had to be the case as the order book reduction has been dramatic and sustained,” he tells GTR.
Aldridge explains that the company has had to restructure to make the new running level of 60% of the pre-pandemic order book economically viable. “We need planes flying again and the full production of planes to return,” he says.
In the longer term, savings will be achieved through a combination of early retirements, part-time roles, reduced capital spend, job consolidation and lean initiatives.
Meanwhile, the automotive sector is also struggling. It was already under pressure before the pandemic due to weak sales, disruption from new emission standards, and profitability strains as the industry invests in new technologies. Electric vehicle company Tesla became the world’s most valuable automotive company in July, storming ahead of Toyota, and proving that traditional auto makers face huge upheaval away from the impact of the virus.
The pandemic only caused more worries for the auto industry, which, according to an Oxford Economics report by Foreman published in July, had low cash reserves coming into Covid-19. The sector also accounts for more than 11% of EU manufacturing jobs.
Demand for new commercial vehicles across the EU remained weak in June, with commercial car registrations decreasing by 20.3% compared with the same month in 2019. However, the rate of decline is significantly slower than that of April (-67%) and May (-44.4%), when registrations really tumbled.
The plummet in demand caused some auto manufacturers to raise cash to improve their available liquidity. German giant Daimler, the maker of Mercedes, said in April that it was increasing its financial flexibility with a €12bn loan from BNP Paribas, Banco Santander, Deutsche Bank and JP Morgan. The facility can be used within a 12-month period with two six-month extension options.
Elsewhere, Fiat Chrysler’s (FCA) Italian unit signed a three-year, €6.3bn credit facility with Intesa Sanpaolo in June. The proceeds will be dedicated to FCA’s activities in Italy, and to support the more than 10,000 SMEs in its local supply chain. The facility is 80% guaranteed by Sace, Italy’s export credit agency.
The European Automobile Manufacturers Association, along with several other trade associations and unions, have called on the European Commission for an industrial recovery plan. It is based on two core objectives: to bring the industry back on track by stimulating sales and reviving production, and to support the sector in its journey towards a carbon-neutral future.
Food and pharma
Given its essential nature, food and beverage production – Europe’s largest manufacturing sector in terms of jobs and value added – is expected to experience a “decent rebound” that is consistent with the pattern seen in the recovery stage after previous global recessions, finds the Oxford Economics report by Foreman.
“Food is likely to recover because we will always need to eat,” says Coriolis Technologies’ Harding, although she warns there are threats to food supply chain issues in emerging economies.
Nevertheless, a number of coronavirus outbreaks in labour-intensive meat processing plants across Europe have caused disruption and closures, raising concerns that the necessary health and safety measures are not being adhered to in such environments. In June, a plant owned by Tönnies, Germany’s market leader in meat production, quarantined its 7,000-strong workforce after more than 1,500 workers tested positive for the virus. There has since been a “noticeable” increase in the number of coronavirus infections among the wider population of Gütersloh near the factory in western Germany, reports Deutsche Welle.
Despite these outbreaks at factories, the food industry has relatively good levels of cash reserves to cover running costs during periods of weak demand and lower profits, finds Oxford Economics.
The same can be said of pharmaceuticals, which is one of the only manufacturing sectors to have grown through the crisis in certain sub-sectors. Harding points to biopharma as an example; a segment that focuses on medical drugs, such as vaccines, produced using biotechnology.
Unsurprisingly, demand for a Covid-19 vaccine has created opportunities for pharmaceutical manufacturers, including British-Swedish pharma giant AstraZeneca.
However, a debate over pricing means using a vaccine as a vehicle for large profits could be politically problematic.
A group of NGOs and academics in the UK have expressed concerns about the risk of pharmaceutical companies profiting off the pandemic. “There is a real danger that without safeguards, pharmaceutical companies may gain exclusive rights to a new vaccine, which in turn could lead to price gouging and unaffordable prices for millions of people,” reads the open letter to the UK government.
Recovery fund could be key
On July 21, EU leaders agreed on a €750bn recovery effort to help the bloc tackle the economic crisis caused by the Covid-19 pandemic, €390bn of which will be distributed in the form of grants, with the remaining €360bn earmarked for loans to facilitate member states’ recovery.
A large proportion of these grants, €312.5bn, and all of the loans distributed, form the EU’s ‘recovery and resilience facility’. Member states are required to prepare national recovery plans to reform their economies in order to access their share of the funding, which will be distributed from 2021-23. Capital raised on the financial markets will be repaid by 2058, says the European Council. The remaining €77.5bn in grants will be used to top up EU budgetary programmes.
The recovery and resilience plans will be assessed by the European Commission within two months of submission based on a set of criteria: consistency with the country-specific recommendations of the European Semester; strengthening the growth potential, job creation and economic and social resilience of the member state; and effective contribution to the green and digital transitions.
The fund will provide crucial support to hard hit industrial sectors such as automotive and aerospace, says Foreman. “Such support will allow manufacturers to innovate during the recovery phase, boosting long-term growth prospects.”