The worst kind of problems: The Auto Industry

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London (CNN Business)Global carmakers are being rocked by problems of the worst kind: The ones beyond their control. They’ve been under pressure for months but events over the past two weeks have underscored the urgency with which executives must find answers to the huge challenges roiling the industry.Sales are being undermined by the economic slowdown, escalating trade tensions and dramatic regulatory changes, driven in part by the climate crisis. Profits are evaporating, jobs are being cut and the CEO of one of the industry’s strongest brands has resigned. Automakers that are able to navigate the wave of disruption will have more cash to invest in technology needed to compete with traditional rivals and tech companies in the race for the electric car. Laggards may not survive. Content by NEC How smart cities can make people happier A new wave of tech is making cities smarter. But can it make their citizens happier? “These are moments of inflection and that’s why there’s stress on the production and employment, because the technology is changing,” Ford CEO Jim Hackett told CNN Business.

Trouble in China

China’s Geely (GELYF) revealed this week that its net profit probably plunged by 40% in the first half of the year as the world’s second largest economy slowed. In June alone, its car sales fell 29%.Several major Chinese automakers have experienced even steeper falls. But global brands are suffering too in a market that had long been a source of huge growth.Ford (F) sold nearly 22% fewer vehicles in China during the second quarter than in the same period a year ago. General Motors (GM) posted a 12% drop in vehicle sales in China for the quarter.China’s car market shrank for the first time in more than two decades in 2018, and the slump has deepened this year due to weaker economic growth, the trade war with the United States, and new emission standards.While June brought some relief — Chinese car sales increased as dealers discounted old models before the new standards took effect — the malaise is expected to continue. LMC Automotive analysts predict China’s vehicle sales will shrink by 5% this year, after falling 3% in 2018.

The trade war between China and the United States remains a major risk. The two sides have agreed to restart trade talks, but tariffs remain in place and further disruption could mean lean years ahead for carmakers.

A German vice

German carmakers are in a particularly tough spot. BMW, Volkswagen and Daimler, which owns Mercedes-Benz, have big operations in China. They also face weak economic growth at home, residual pain from the diesel scandal and new emissions targets.Daimler (DDAIF) warned Friday of a slump in profits this year because of recalls, legal issues and weak sales. It expects a second quarter loss of €1.6 billion ($1.8 billion), and its van business is in dire straits. Its rival BMW (BMWYY) has problems of its own. The luxury automaker said last week that CEO Harald Krueger was standing down. The company’s profit shrunk in the first quarter, and its automotive division posted a loss. BMW’s supervisory board is due to meet on Thursday to try to find a successor for Krueger.At Volkswagen (VLKAF), the world’s largest carmaker, global vehicle deliveries dipped 2.8% in the first six months of the year.All three are exposed to further escalation of the US trade war with China, but they would also be walloped if President Donald Trump follows though on his threat to tax cars made in Europe.”Tensions are reducing our market potential,” Volkswagen CEO Herbert Diess said Friday. “We are trying to do our best … to make that trade doesn’t become really local, because this is a global industry.”Also stalking carmakers in Europe is fear of a chaotic Brexit in October that would mess with just-in-time supply chains and could lead to tariffs on cars moving between the European Union and Britain.

The race to the electric car

With profits hard to come by, carmakers are slashing costs to free up money to invest in electric cars. Ford is cutting 12,000 jobs and closing six plants in Europe, including an engine factory in the United Kingdom. Jaguar Land Rover, which is owned by India’s Tata Motors (TTM), is slashing 4,500 jobs. Honda is also closing a plant in the United Kingdom. A radical realignment of the industry is underway. Daimler and BMW have teamed up to develop ride sharing and driverless technology, while Honda (HMC) has invested in General Motors’ autonomous car unit.Increasing pressure, combined with new threats from tech companies trying to muscle into the auto business, could eventually force carmakers into mergers. Nissan (NSANF) and Renault (RNLSY) are desperately trying to keep their alliance together in the wake of Carlos Ghosn’s fall from grace, while Fiat Chrysler (FCAU) is considering its next steps after a merger proposal was rebuffed by Renault in June

On Friday, Volkswagen and Ford said they would extend their cooperation beyond commercial vehicles. Ford, which does not currently sell any fully electric vehicles, will use a Volkswagen platform to develop them for sale in Europe.Volkswagen has also agreed to join Ford in investing in Argo AI, an autonomous vehicle platform company valued at $7 billion.

Laura He contributed to this article.

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