Daimler AG (DMLR.Y), the parent company of the Mercedes-Benz luxury brand, is shutting down "majority" of its production in Europe as the government scrambles to tackle the COVID-19 pandemic.
With that, Daimler becomes the latest automaker to suspend operations in Europe. While Ford Motor Company (F) is shutting down its main manufacturing facilities in continental Europe, Volkswagen (OTC:VWAGY) plans to halt production at all of its factories in Europe in the coming weeks, including Lamborghini and Ducati factories.
In fact, from Fiat Chrysler Automobiles to Renault to Peugeot SA, you name it and it's there: The entire auto industry in Europe is shutting down even as the U.S. Centers for Disease Control and Prevention (CDC) issued a Level-3 warning, recommending avoidance of all non-essential travel to most countries in Europe.
Why is Daimler closing European plants?
Daimler is shutting down factories as well as administrative departments for two weeks initially, starting this week, in line with the recommendations of "international, national and local authorities." That includes plants that manufacture cars, vans, and commercial vehicles. Daimler is well-known for its namesake trucks and buses.
Daimler said that while the primary reason behind the shutdown is to protect its workers and prevent the spread of coronavirus infection, the production break should also help the company prepare for a "period of temporarily low demand" and protect its balance sheet.
How low could demand go? Well, in a statement released on March 17, Chairman of the board of management at Volkswagen group Dr. Herbert Diess called 2020 a "very difficult year," with the coronavirus pandemic presenting the company with "unknown operational and financial challenges." I believe in the present situation, that holds true for all car makers in Europe. Investing in car stocks requires nerves of steel right now.
How important is Europe to Daimler's production and revenues?
It's unknown yet when operations will resume, and what impact it might have on the company. However, although Daimler didn't specify which plants it's shutting down, "majority" of production would include plants across all its business segments: Mercedes-Benz cars, Daimler trucks, Mercedes-Benz vans, and Daimler buses. The first made up half and the second roughly 22% of Daimler's revenue in 2019.
Also, Europe contributed 40% to Daimler Group's total revenues in 2019, with Germany making up 15% of total revenues.
It's a terrible situation to be in, given that Daimler already took a sharp hit to profits in 2019 and has an uphill task at hand to deal with diesel-engine emission charges amid other headwinds.