Effects of Covid-19 on Turkish Automotive Industry
While financial risks are increasing in global markets, the economy is hit hard by supply chain disruptions and its negative effects on imports and exports. In addition, the measures put forward in the fight with the epidemic substantially affect the domestic demand and this leaves the economy in a difficult situation. There, the automotive industry is among the much-affected sectors by the epidemic. That is the case in Turkey as it is throughout the world. The global automotive market may experience more than 10% contraction in 2020 which was 4% in 2019.
In Turkey, such negative effects became even more evident in the days the epidemic spread rapidly in Europe, because the most important trading partner of the Turkish automotive industry is the EU countries amounting to more than 80% of exports to EU countries. Therefore, once the epidemic hit Europe, a direct negative impact on the automotive industry regarding both the production and export became more evident in Turkey.
While facing the pandemic, considering the Turkish automotive industry as an alternative to China turned into a viable option as this would strengthen the supply chain of the automotive industry for Europe. This mindset can be seen as one of the upsides of Covid-19 for the Turkish automotive industry. There is already a massive production capacity of over two million vehicles annually, and a well-established sector with plants in much desirable locations in Turkey. Arguably, the sector in Turkey is much affected by Europe, but not as much by the supply chain disruptions in China. European producers, who could not get supply parts from China started to ask Turkey whether they have the capacity to produce new pieces on demand. This gives the Turkish sector hope to look at the future differently. It is considered that Turkey is one of the most advantageous countries to create an alternative supplier industry to China. If so, Turkey can, after all, tap into its potential.
In the first quarter of 2020, while sales were falling across Europe, it was increasing in Turkey. During that time, the automotive industry saw market increases by up to 30% and sales increase up to 44% in Turkey. After all, in the first quarter of the year, one of the three countries that increased their sales in the European markets is Turkey. However, once we investigate the numbers of April 2020, we can see the real negative effect of Covid-19, with a market decrease of up to 29% and substantive total production decrease. Automotive dealers, for instance, expect more than 20% turnover loss this year. According to the industry leaders the main issue is in commercial vehicles and bus markets, which has narrowed due to the slowdown in tourism and trade. Both export demand and domestic demand regarding commercial vehicles are almost nonexistent.
Serious disruptions and losses in production and drop in sales have several important reasons such as the sudden drop in EU markets and order cancellations, and discontinuation of the production in many factories. For instance, the automotive industry in Turkey experienced sudden supply chain disruptions including difficulties in the supply of components routinely brought from Europe. Supply chain disruptions are compounded by the fact that many plants in China have been severely affected by the coronavirus outbreak and that made it increasingly difficult for vehicle manufacturers to supply the parts they need. Many factories in China are now back in operation, but problems in the supply chain seem to continue. Also, there have been logistic challenges due to interruptions and slowdowns at border crossings and ports, and as we all experienced both production and sales have paused. Most automakers put production activities on hold to protect their employees’ health. Also, traditional sales channels are cut to protect dealerships, employees, and consumer health. Adding to that the significant drop in demand for new vehicles in the global automotive market, the industry is indeed hit hard. Once the epidemic is seen in Turkey as well, almost all automotive manufacturers decided to pause their activities for a while. Subsequently, automotive manufacturers resumed their production in turn. All major automotive factories in Turkey have resumed their activities by May 11th and are working towards adjusting to the “new normal”.
The industry had already experienced a contraction in 2019. The government had then provided incentives to prevent economic recession. With that, automotive sector in Turkey had only showed recovery in the last quarter of 2019. This time, however, the sector is under the threat of Covid-19 epidemic. Government incentives including interest and tax reduction advantages are much needed at this point. Therefore, the industry leaders are currently expecting vital government incentives well responding to the pandemic.
Because of the Covid-19 epidemic, in Turkey, the April, May and June payments of VAT withholdings and Social Security Institution premiums are postponed for 6 months for the automotive and some other industries.
Various debt relief programs are also available from state-owned banks such as:
- Extensions on loan re-payment dates,
- Cheque payment support,
- Employee salary support,
- Restructuring of existing loans, and
- Increased corporate credit card limits.
However, so far, there is no incentive or support for the automotive sector that has come into force other than the abovementioned ones. The government may still implement a funding and incentive program in the near future.
In the meanwhile, the industry leaders have already asked the government to expand the definition of “force majeure” to cover the entire automotive supply industry, to delay payments of loans from public and private banks for at least six months without interest, to remove various limiting conditions on (Credit Guarantee Fund Support and Turkish Eximbank) loans, and to improve conditions of the “Short-time Working Pay”. Finally, the government responded with a 60% payment coverage of employees’ salaries for up to 3 months. There is however a cap of 150 percent of the minimum wage. Since the minimum wage is not high, especially for the salaries over the minimum wage, the coverage is much lower, compared to the ones available in Europe for instance.
Finally, warranty periods are extended. For instance, Mercedes-Benz Turk decided to extend the warranty period of Travego and Tourismo buses sold in 2019 to support intercity bus owners who were affected by the intercity travel restriction due to the pandemic.
What awaits the automotive industry after the epidemic?
- Growth has halved. In the first two months of the year in Turkey, cars, and light commercial vehicle market showed 90% growth compared to the previous year. This resulted in a relatively low stock level of dealers. However, there are still some automotive brands with high inventory in their retail channels. Later, this figure fell to 40% in March. It is believed by the experts that the automotive industry should develop sales and after-sales experiences using the digital world to keep up with the rapid change in the working patterns that emerge from this epidemic. In the short and medium term, while the sector is trying to survive, there will be a slow down its investments in autonomous.
A slowdown is also predicted in the rising trend of the electric car market. The argument is that “Electric vehicles are relatively expensive and currently there is less money in people’s pockets.” Therefore, “Electric vehicles will continue to be important, but conditions have changed. Manufacturers are investing heavily in electric vehicles, but Covid-19 has changed its timing.”
On the other hand, the need for remote services is expected to increase investments in digitalization and related vehicles.
- Public transportation use fell more than 80%. With the pandemic, nobody wants to share their vehicle with someone else or enter crowded places including buses and subways. While daily rentals are falling, long-term rentals may increase.
- The desire of some consumers, who have the potential to buy cars for the first time, will become stronger with the desire of staying away from the crowds because of general health concerns or because of the public transport controls in some areas. Consumers who already have cars tend to see the situation by waiting at the point of buying a car for the purpose of upgrading the model. In addition, the unrest caused by the epidemic further reduces the demand for sudden consumption.
- As wholesale planning becomes more difficult and consumption increases again, an imbalance may occur in stocks. Planning should be made considering that, during the epidemic and immediately after the lockdown, there may be a shortage of vehicles and parts in the stock due to insufficient raw material supply, delaying the restart of production, reduced shipping capacity and intense competition caused by high inventory levels.
Automotive experts stated that the “Dealers should tackle this difficult year and next year by using all areas such as used vehicles, service, spare parts, finance, accessories, warranty extensions.”
We, as legal experts, need to be aware of possible actions available for the industry and we need to share these actions with the industry leaders. Some of these actions are:
- Improving employees’ assurance,
- Improving supply chain flexibility,
- Developing distance sales and similar services with digital tools,
- Strengthening communication with consumers and customers with a focus on after-sales services,
- Increasing the support for sales channels,
- Informing the customer about the epidemic and providing the customer with health and work safety and guarantee,
- Planning cash flow with an understanding of the cash flow risk in the sector,
- Strengthening cooperation in production and sales, and
- Flexibility in adjusting the supply-demand rate.
Informing and supporting the clients about these actions and providing road maps to the clients in these areas would greatly respond to the daily questions and needs of the clients.
Measures to be taken against risks;
Human, financing, and resources are at the center of the current risk and measures to be taken against it.
- Focus on customer demand, creation, and improvement of customer contact points, and focus on employee care, protection, health and safety assurance, and career development.
- Focus on cash flow risk, especially in retail channels that are directly affected by the market.
- Strengthening production and sales-oriented cooperation, improving supply chain flexibility.
In the short term, the problems are obvious. In the medium and long term, businesses should focus on the following issues without hesitation:
- Optimizing business sustainability plans,
- Improving the risk assessment and mitigation capabilities at both organizational and corporate levels,
- During the decision-making process, improvement should be made in providing accurate and timely information,
- Doing a desk study on multiple scenarios with a scientific method.
In the long run, the automotive industry is transforming into a customer-centric approach. Although there are short-term negative effects and market uncertainty of the epidemic, the epidemic also directs all elements of the industry to proactively think about how to improve the customer experience and to develop solidarity within the industry.
For further information on this topic please watch the IBA Webinar available at https://www.ibanet.org/Disrupted-Industries.aspx
Oya Deniz Kavame
Attorney at Law, Mediator, Founding Partner of Kavame Law Firm
Phone Number +90 216 266 3435
Fax Number +90 216 266 3401
Email Address email@example.com