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Will Layoffs, Furloughs Help Carmakers Survive Coronavirus?

Ritujay Ghosh

On Apr 7, Tesla, Inc. TSLA reportedly informed its employees of salary cuts and hourly worker furloughs until May 4, as production has been halted at its California plant owing to the coronavirus outbreak. The salary cut and furloughs are likely to continue over the next few months.

An increasing number of carmakers are resorting to layoffs, salary cuts and furloughs as the last resort as they scramble to conserve cash with production coming to a standstill and vehicle sales nose diving. The auto industry has already been grappling with declining sales of cars over the past few years. To make things worse, coronavirus is now eating further into the profits of these companies.

Tesla Announces Salary Cut, Furloughs

Following health orders implemented to contain the spread of COVID-19 in the United States, Tesla had to wind down production at its main assembly unit at Fremont, CA. The company suspended production at its San Francisco Bay Area vehicle and New York solar roof tile factories on Mar 24.

Tesla in an internal e-mail to its employees, which was seen by CNBC, said that salaries of its employees will be slashed beginning Apr 13. It further mentioned that the cuts will be in place until the end of the second quarter. Workers in its U.S. facilities will take a pay cut of 10%, while directors’ and vice presidents’ salaries will be slashed by 20% and 30%, respectively. Employees, who cannot work from home, will be furloughed until production resumes.

Tesla, however, put up an impressive show in the first quarter. The electric carmaker delivered approximately 88,400 vehicles and produced 103,000 in the said period.

Other Carmakers Adopt Similar Stance

Most carmakers in the United States and Europe have been suffering since the coronavirus outbreak. General Motors Company GM has shuttered all its plants in the United States. The company announced that it is evaluating its factories’ production status on a weekly basis. The company is past its initial shutdown period till Mar 30 and is now extending the closures.

The carmaker had earlier said that its salaried employees will have 20% of pay deferred in lieu of layoffs for the time being. Fiat Chrysler Automobiles N.V. FCAU has told it workers that 20% of their salaries from April through June will be deferred until later. Also, the top 30% executives of Ford motor Company F have agreed to defer 20% to 30% of their salaries for a period of at least five months. Ford also said that its key U.S. facilities won’t resume production until Apr 14.

On Tuesday, Honda Motor Co,. Ltd HMC and Nissan Motor Co., Ltd NSANY extended their factory shutdown. Per a Nekkei report, both companies are planning to lay off 10,000 workers each at their U.S. plants. Honda’s U.S. plants have been idle since Mar 18. However, plans now are to restart production on May 1. Ford, Tesla and Honda each carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The idea to go for pay cuts, layoffs and furloughs is, understandably, to conserve cash as car companies continue to bleed with both production and deliveries coming to a standstill. Auto sales have been declining in the United States for a while now. Following the coronavirus outbreak it has further taken a hit. U.S. auto sales plummeted in March. General Motors delivered 618,335 vehicles in first-quarter 2020, declining 7.1% year over year on a volume basis. Ford sold 516,330 units, down 12.5% year over year, while Fiat reported sales of 446,768 vehicles, contracting 10.4% year over year.

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