To flourish Czech automotive industry needs to take advantage of electromobility trend, says economist

The effects of the global coronavirus pandemic and the associated chip shortage resulted in a substantial fall in Czech automobile production in 2021 and freshly released data for January showed the worst year-on-year production fall in more than 10 years. According to Jan Bureš, the chief economist at Patria Finance, the next one to two years will likely see the Czech automobile sector fluctuate. What he sees as key for the future is whether local manufacturers manage to successfully react to new trends.

It looked like the Czech automobile production sector may be on the way to a successful recovery during the second quarter of last year. Production levels in the most important segment of Czech industry were significantly above those registered during the initial, full lockdown months of the pandemic in 2020 and almost reached prepandemic levels. However, the subsequent global shortage of semi-conductors wreaked havoc in the spring and the early months of autumn. Despite a subsequent rise in Novermber, the last month of the year saw yet another fall in production numbers, this time by nearly 16 percent.

The Czech Automotive Industry Association estimates that the global chip shortage led to around 300,000 cars that could have been sold on the market not being produced.

January data, which was published by the association on Thursday, suggest that the sector is still in a crisis, with year-on-year production down by 11.4 percent, the lowest it has been in January since 2010. However, the association states that aside from the chip shortage, this is also down to changes in production at some plants, such as Toyota’s Kolin plant preparing to switch from the Yaris model production to making the new Aygo X.

The association’s managing director, Zdeněk Petzl said that while he believes that the situation will gradually improve this year, subcontractor issues, Covid related worker shortages and the general rise of raw material prices remain a serious issue.

Jan Bureš, the chief economist at Patria Finance, told Czech Radio that he does not expect the car industry will get back to normal in the coming months.

“It looks like the automotive sectors in Czechia and Germany are finishing orders that they were not able to complete at the end of 2021. Based on the information that is coming out of the sector for now, we can assume that the return to normal is slower than was originally anticipated. At least in the first half of this year we will likely see repeated ups and downs in automotive production rates.”

Jan Bureš | Photo: Tomáš Adamec,  Czech Radio

Although the pandemic seems to be slowly fading out in Europe, the economist stresses that many Asian countries are still pursuing a zero-tolerance policy when it comes to the coronavirus and hard lockdowns in this region of the world could lead to further disruptions in supply chains.

“We could see ports and production facilities close down again, so, while I am optimistic and I do believe that the second half of the year will look better, some subcontractor shortages could still occur. The logistics sector is likely to recover at a slower pace. We can see large queues at ports in Asia, Europe and America and it will not be easy to set this all back to normal. I think this will impact electronics and automobile manufacturers particularly hard.”

Even if the automobile sector does puck up in the second half of 2022, the economist expects that it will still fluctuate for the next one or two years.

Automobile manufacturing employs around 180,000 people in the Czech Republic. Aside from the iconic Volkswagen owned Škoda Auto, the country is also home to factories belonging to manufacturers such as Hyundai, Toyota and bus manufacturer IVECO. Just as in neighbouring Germany, the car industry plays a leading role in the Czech economy and that Jan Bureš believes that it is the dependence on this sector of economy that is largely responsible for both countries experiencing a slower recovery than expected.

“To a large degree this is related to the structure of our economies. By that I don’t necessarily mean that the Czech and German economies are oriented on manufacturing, rather it is simply down to how dependent they are on sectors such as automotive. That sector suffered by far the greatest from supply chain shortages. Meanwhile, countries like Italy, which are more dependent on their food and textile manufacturing industries, remained virtually unscathed by the types of problems that we experienced here or in Germany.”

However, the Czech and German focus on car manufacturing could also be a beneficial for both economies once the automotive sector recovers, Bureš says.

“A lot of contracts have built up which car manufacturers are not able to fulfill. Once those subcontractor issues get fixed sales will certainly go up and this could be a boon for carmakers, because we’ve also seen a rise in prices. Consumers seem to be willing to pay more and this would suggest that the situation will gradually improve in this sector.”

Photo: Škoda Auto

While this would no doubt be beneficial for the Czech economy’s recovery, the Patria Finance economist stresses that the country needs to think strategically in the space of the next three years and focus on taking advantage of the electromotive trend in the European automobile manufacturing sector.

“In this regard, I think that the key question is whether we will be able to attract large European investments and make use of them. If we don’t, it is quite possible that the main trends in the development of the automotive sector will happen outside of this country.”

The Czech Republic is currently being considered by Volkswagen as a possible location for one of its battery gigafactories. The car maker has announced that it intends to build six of these factories in Europe by the year 2030 and is expected to make the decision on whether one of them will be in Czechia sometime this year.

Bureš hopes that large facilities such as this one could have a trickle down effect on domestic manufacturers as well.

“I think this is a really key opportunity. Whether we like it or not, the automotive sector is changing. It is currently headed in the electromobility direction and it would be ideal to be in the ride side of this trend. That is why I think that investments like this gigafactory are very important. They can lead to the emergence of more manufacturing, more subcontractors, basically a whole ecosystem connected with electromobility.”

However, when it comes to the question of European car manufacturers becoming more autonomous in their logistics systems, Jan Bureš is more sceptical. Supply chains such as these take a long time to alter and a grander strategic reset would be needed for this to work, he says.

Authors: Thomas McEnchroe , Naďa Bělovská
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