Covid-19 - impact on the automotive industry
7 experts from our international partnership with a focus on the automotive industry talk about the impact of COVID19 on automotive sales, plus factory and dealership closures?
Government-backed loans - Louis Burns, Vesko Petkov, Mazars in the UK
The UK government has deferred VAT payment until end of June 2020; businesses will then have until the end of the 2020-21 tax year (likely the end of the company’s VAT year, in March, April or May 2021) to settle any liabilities that have accumulated during the deferral period. The deferral applies automatically, and businesses do not need to apply for it. VAT refunds and reclaims will be paid by the government as normal. Other relevant measures include:
- Time to pay arrangements for all taxes e.g. corporate tax, PAYE, NI and VAT can be agreed if companies in temporary financial distress due to Covid-19;
- Coronavirus Job Retention Scheme, which will pay up to 80% of employees’ salaries who might otherwise be made redundant, up to £2,500 a month. Furloughed workers are not be able to do any work for the company during the period of furlough.
As for the funding available:
- There is the Coronavirus Businesses Interruption loan for those with up to £45m turnover 80% government guarantee, government pay arrangement fees and interest for a year;
- The same loan is available for businesses up to £500m turnover - with 80% government guarantee and commercial interest rates
- There is also a coronavirus corporate finance scheme available for the largest businesses.
Incentives in the making - Grégory Derouet, Pauline Blachere, Mazars in France
Manufacturers have been gradually opening since the end of April in France, with new social distancing measures in place. As for government intervention, the 2019 ecological bonus has been extended by three months for companies, due to the economic difficulties caused by containment. Measures for individuals could take a similar form.
It is early days for other measures in France, but we know the Minister for the Economy is considering tax incentives to boost the automotive industry including:
- Encouragement to buy an electric or hybrid vehicle, so that the economy and growth can be relaunched at the same time as boosting sustainable, green growth.
- In the short term, stimulating demand for destocking and to regain turnover with purchase premium, i.e. a sum paid by the state to reduce the price of vehicles, which could be based on the current conversion premium scheme, which would be extended to all types of engines, as long as they are environmentally-friendly.
- It’s important to note that all these measures could mean an obligation to relocate some plants or activities to France.
The Minister do not anticipate any new measure before September, but the representative automotive associations are asking for action as early as June or July.
Political debate over purchase grants - Dr Christian Back, Mazars in Germany
The German government is discussing numerous measures to limit the damage to the automotive industry. ‘Purchase grants’ - a direct reduction of the purchase price for new cars which are paid by the government - are currently the focus of the political discussion with two political camps taking shape. On one hand, there are strong concerns that grants would favour private rather than public transport and are not focused enough on environmentally friendly technologies. On the other hand, approximately 450,000 jobs are in jeopardy in the German automotive industry, so the purchase grants are being asked for regardless of the technology in question – namely, diesel or petrol engines.
However, the German government will not reach a decision on these grants before the beginning of June. Suspending the decision about grants for new cars has been criticised by the automotive industry as customers might wait to buy until discussions are complete while the industry needs increased customer demand.
Beside this, tax & cash benefits, extension of short-term work as well as an unlimited volume of loans have been granted by the German government to support companies of all sizes, employers and employees in Germany, but not especially dedicated to the automotive industry.
Protection programmes for small and large - Jeremy Rice, Mazars in the US
In the US, there has been a complete shutdown of the auto industry. The first plant closures started in late March, with all production facilities closed by the first week of April. No plants have opened during the first week of May 2020.
There are a variety of programmes offered to aid companies during the crisis, but the benefits are limited to large automakers and parts suppliers. Unlike the 2008/2009 recession, there is not likely to be a bailout of automakers. One of the main programmes for small businesses is the payroll protection act, which provides forgivable loans to companies with 500 or less employees, if those loan proceeds are spent on payroll, rent, and utilities during the eight weeks after the loan is provided.
For larger companies, there is some relief offered through reduced and deferred payroll taxes for wages paid during the crisis. While helpful, it is often not enough to make up for the losses being incurred. In addition, there was money put towards the unemployment program which provides more money and for a longer period of time to those who lose their jobs or are furloughed during the crisis.
Currently, the auto industry is lobbying the government to provide additional incentives to consumers to jumpstart demand, but nothing has been formally announced so far.
Cost exemptions and reductions for businesses - Helena Mao, Mazars in China
Factories are reopening and the industry is restarting in China. The government has introduced the following tax incentives to help with the recovery:
- Imported materials donated for the epidemic prevention and control shall be exempted from import duties, VAT and excise tax.
- Cash and goods donated by enterprises and individuals for the epidemic prevention and control are allowed to be deducted in full amount before CIT/ IIT.
- The maximum carryover period for the losses incurred shall be extended from five to eight years in 2020.
Other policies vary by region, but if we take Shanghai as an example, businesses can access:
- Extended social security contributions payment to three months after the epidemic is over (date not yet defined and postpone the adjustment of social security contribution base from 1 April 1 to 1 July.
- The premium rate of employees’ medical insurance (including maternity insurance) paid by enterprises is temporarily reduced (from 10.5% to 5.25% for February-June and then increased to 10% from July to December.)
- Exemption and reduction of pension, unemployment, work-related injury insurance. For large scale enterprises, there is a 50% reduction (currently 16.66%-18.02%, after reduction, 8.33% to 9.01%) from February to April 2020. Meanwhile, for medium, small and micro enterprises, total exemption from February to June 2020.
As for financial credit support, loan interest rate discounts can be granted up to 50% of the current market rate to support enterprises in the sectors hard hit by the epidemic.
Unprecedented production low - Paulo Misse and Franciane Moraes, Mazars in Brazil
March started strong for domestic production, according to Brazil’s National Association of Motor Vehicle Manufacturers (Anfavea) but the closing of factories in the second half of the month resulted in a production decrease of almost 90%. It was the same case for sales: prior to lockdown, sales were up 9% compared to 2019. But the consequent disruption resulted in an 8% drop.
April 2020 was an unprecedented low: there has never been a month with such low production since automotive industry records began in 1957. According to Anfavea, just 1,847 vehicles were produced, including automobiles, light commercial vehicles, trucks and buses. That’s a fall of 99% over the previous month and 99.4% over April last year.
Vulnerable to the global supply chain - Akhil Puri, Mazars in India
2020 was already shaping up to be a year of low demand in India – and production shutdown has made things worse for the sector. At home, consumers have postponed vehicle purchasing because of economic uncertainty and an inability to shop at dealerships, while abroad, exports have slowed due to the global shutdown and slowdown in key markets. Plant closures of OEMs in the US and Europe will also impact the export of Indian auto-components.
In this scenario, inventory build-up for export-oriented entities is expected to continue, which will lead to increased working capital cycles. What’s more, the deferral in payments announced by some OEMs, coupled with fixed overheads, will lead to an increase in working capital requirements of auto-ancillaries, posing risks for smaller players which have limited liquidity and financial flexibility.
Factories were closed from 24 March until 3 May and have been allowed to reopen from 4 May. All dealerships were closed on 24 March. However, certain dealerships based on the risk assessment have been allowed to reopen from 4 May.
The next article in our Restarting the Automotive Industry series will look at Fiscal initiatives in different countries and their impact on the automotive industry.