Weekly Update: COVID-19 Impact On Global Automotive Industry

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Week 7: Southeast Asia Pressure Points

As the world continues to deal with COVID-19, economies are moving into recession. The automotive sector, with its large-scale production and tightly interconnected global supply chain, remains the worst impacted.

This week we focus on the impact to Southeast Asia, with ASEAN representing the fifth-largest auto market cluster in the world.

Lockdown measures introduced mid-March

Like many others, most ASEAN countries underestimated the risk of outbreak at the start of the year, with governments doubtful on it becoming a pandemic. Remaining tentative on diverting resources to public health, most ASEAN countries waited, introducing lockdown measures only around mid-March. As a result, key economic sectors in the region remained, for the most part, unaffected by the outbreak before this time – this included international travel, tourism, and export dependant businesses.

However, as the crisis erupted and lockdowns ensued, millions across the region rapidly began losing jobs as business came to a standstill. As immediate countermeasures, central banks across the region introduced rate cuts and easier lending terms to ensure liquidity. Governments also announced fiscal support measures including direct disbursement, soft loans, and tax cuts to mitigate the impact of the potential economic crisis.

The auto sector has been hit hard, with overall Q1 vehicle sales in ASEAN5 (Indonesia, Malaysia, Philippines, Thailand, and Vietnam) falling to 683,000 – levels not seen in nearly a decade.

Declines for the month of March are the most revealing, with new vehicle sales plummeting around 40% YoY across ASEAN, and auto OEMs selling only 197,000 vehicles – this compared to 328,000 a year earlier. We expect April to be worse, with auto production remaining shut across the region last month and economic damage possibly worse than the 1998 Asian financial crisis.

Significant revisions to our Indonesia, Thailand, and Malaysia Automotive Outlook

Economic growth in the region was already slowing down due to US-China trade tensions, and lockdowns have only exacerbated the situation – especially in Thailand and Malaysia. The extent and duration of distancing measures have been severe, and we have reviewed our FY 2020 outlook in this updated context.

Indonesia

In Indonesia, SE Asia’s largest auto market by volume, vehicle sales saw a comparatively moderate Q1 decline of 7% YoY to 237,000 units, with negative lockdown effects mitigated by a mid-March rollout. Though skeptical early on, the government eventually announced a partial lockdown on March 18, allowing only essential businesses such as food, healthcare, banking, and utilities to operate; as a result, vehicle sales for the month dropped 15% YoY to 77,000 vehicles.

With the full effect of shutdowns to be felt in the weeks ahead, we project steeper YoY vehicle declines from April onwards. And with a recession imminent, Counterpoint estimates this year’s auto demand to fall 36% to 603,000 units.

Thailand

One of the region’s largest markets, Thailand reported Q1 sales of 200,000 units, a YoY decline of 24% after an especially bad March, which saw a 42% YoY plunge to 60,000 units. This has worsened the shrinking market, which took a U-turn in 2H19 after two straight years of strong growth.

With a prolonged lockdown, Counterpoint expects broad-based economic challenges resulting in a 2020 GDP decline of -5.5%, the worst drop since the 1998 Asian financial crisis. We have revised this year’s outlook accordingly, and estimate new vehicle sales of 745,000 units, a 28% annual decline.

Malaysia

Malaysia was one of the worst-performing markets in the region with Q1 sales falling by over 26% to 106,000 units. The government implemented its Movement Control Order (MCO) from mid-March, prohibiting all interstate and international travel, and sales of non-essential items including automobiles. Sales plunged by almost 60% in March to around 22,000 units. With no new vehicle production and all dealers in the country closed, zero vehicle sales have been reported for April.

While Malaysia has begun to ease lockdowns, allowing resumption of partial manufacturing operations, restrictions on reaching full capacity at automotive plants remain in place until June 9. Counterpoint estimates Malaysia’s vehicle market this year to fall by over 29% to 426,000 units.

The Philippines and Vietnam

The Philippine market is fell in Q1 by over 16% YoY to 90,000 units, with the impact of the pandemic becoming evident only in March when the government began mid-month to lockdown the country’s most populace regions. We expect the full effect of the pandemic to become more apparent from April.

Vietnam was the region’s worst-performing market during the quarter, with sales estimated to have dropped around 32% YoY to 50,000 units. Its comparatively bad performance was due to Vietnamese authorities in February taking an earlier stand to contain the spread of the virus. Recently on May 20, the Vietnamese government, in a move to stimulate automotive demand, has approved plans to reduce vehicle registration fees by 50% till the end of the year.

2020 ASEAN vehicle sales outlook

We have revised our overall vehicle sales projections for 2020 and now estimate a YoY decline of 30% to 2.3m units, with country breakdowns as follows:

Exhibit 1: ASEAN5 Vehicle Sales, Q12019 & Q12020, ‘000 Units

Counterpoint: COVID19 ASEAN Automotive Sales

 

Exhibit 2: ASEAN5 Vehicle Sales, 2016-2020E, ‘000 Units

Counterpoint; COVID19 ASEAN Annual Vehicle Sales

Note: The nature of the current global health crisis means we cannot rule out further revisions to the global 2020 automotive forecast.

Author: Vinay Piparsania

Week 6: Challenges in Syncing Supply Chain

As the COVID-19 pandemic broke out in China at the beginning of the year, vulnerabilities in the global automotive supply chain were exposed with nearly 85% of the world’s supplies dependent on China in some way or another. The ripple effect was felt globally, and most auto manufacturing came to a sudden halt as lockdowns shut plants.

Even before the pandemic, the industry was stressed financially from increased emissions-related upgrade costs and increased R&D investments in emerging technologies. As manufacturing operations resume, the added burden of COVID-19 safety protocol compliance, plummeting demand, and inefficiencies from underutilized capacity are further exposing OEMS and suppliers to severe liquidity issues. Further disruptions are likely to continue, bringing the possibility of major consequences to specific segments of the auto ecosystem.

Most regions remain vulnerable, and Counterpoint expects substantial volume drops in 2020. For example, in the major markets of North America and Europe, we expect base case sales of 13.4m and 13.6m, a YoY decline of 24.1 % and 25.7%, respectively.

Below is our analysis around April updates from key global markets.

China

China’s April auto sales were up 4.4% YoY to 2.07m units, as reported by China’s Association of Automobile Manufacturers (CAAM). February and March saw MoM declines of 79% and 43%, respectively. With April having apparently turned the corner with an MoM increase, we expect the trend to continue over at least the next two months with potential pent-up demand being fulfilled.  However, even as China is now in recovery mode, CAAM expects auto sales to drop 15% in 2020 to 21.3m units. This is in-line with Counterpoint’s recently downgraded forecasts.

US

While US passenger vehicle demand tanked over the past few months, April sales slightly exceeded our expectations falling 46% YoY versus our estimate of a 50% decline. While a catastrophic hit in any other year, the number does offer a glimmer of hope, especially in the context of states and local governments lifting restrictions at manufacturing facilities, dealers opening their doors, and online channels continuing to engage with customers.

Adhering to new safety norms, i.e. frequent plant sanitization, wearing of face masks, and temperature checks upon entry – Daimler and Hyundai have resumed production at their Alabama plants in the last week of April. The UAW union has also given a go-ahead for its members of the Detroit 3 (GM, Ford, and FCA) to return to work. Other automakers plan to follow similar protocols, including modifying layouts and floor plans of manufacturing sites to have fewer workers at each work station. All these additional safety measures will limit the pace of ramp-up and eventual production line rates. While parts inventory may theoretically be available – with WIP material already in place before the shutdown – it will take time to rebuild and stabilize the supply chain, with component suppliers needing to implement safety measures at their facilities too.

May should mark the start of a gradual recovery in US output, although volumes for the month are still projected to decline by 65% YoY. Even with all plants back online, subdued demand will result in lower production volumes. As a result, we expect 2020 passenger vehicle sales to remain 24% below last year.

Europe and the UK

With lockdown measures in place since mid-March, some markets have registered almost no registrations in April. France’s sales fell by 88% last month, while sales in Italy plunged 98%.

New car sales in the UK fell 97% as dealerships remained shut. Interestingly, the month’s top-selling brand, typically dominated by traditional automakers such as Ford, Volkswagen, and Vauxhall – was the Tesla Model 3, selling 658 units, outselling the next two best-sellers combined (Jaguar I-Pace and Vauxhall Corsa at 367 and 264, respectively). Overall, however, the numbers were very small when compared to a year earlier, when Ford’s Fiesta topped the list with 5,606 registrations. In possibly a sign of changing times, Tesla’s online sales system, with buyers pre-ordering their cars and being directly delivered with a contactless handover, may have just given it the edge. Britain’s biggest car factory, operated by Nissan in Sunderland, will not resume production until June.

Overall, Western European registrations fell 80% YoY in April, compared with April 2019, and we expect the declining trend to continue through at least the next six months with risks remaining high on growing unemployment and soaring government debt, as well as the possibility of virus cases picking up as lockdowns are lifted.

India

With the lockdown of all showrooms and manufacturing facilities, the Indian auto industry saw zero production and sales in passenger and commercial vehicles (PVs and CVs) in April, which followed March’s 50% and 88% drop in PVs and CVs, respectively.

The largest carmaker in India, Maruti Suzuki, only managed export shipments of 632 units during the month with port operations having been partially resumed. Similarly, exports of Hyundai and Mahindra stood at 1,341 and 733 units respectively last month, while having reported zero domestic production and sales. Compared to April 2019, when the country reported total PV sales at around 320,000 and exports at 56,800 units, the current lockdown will surely leave some deep economic wounds. With the partial opening of a few plants allowed from last week subject to strict safety and social distancing protocols, every auto manufacturer is working with dealers and supplier partners to rebuild the ecosystem.

With no clear definitive indication of when the social and economic conditions in the country will get back to normal, Counterpoint is holding to its base case scenario of 20% YoY decline in auto sales, and revising the worst-case outlook to a 35% YoY decline should the GDP growth outlook become negative.

RoW

South Korea remains the industry bright spot as the country continues to be successful in managing the pandemic domestically. Sales increased 8.3% YoY in April, a second consecutive month of YoY growth. However, a recent resurgence of some new coronavirus cases may be a growing concern.

There continues to be an increased risk that global passenger vehicle demand could drop to 70m or below if the current economic recession becomes further entrenched or a second significant wave of the virus occurs post-lockdown. While economic interventions and industry incentives could have a big impact on reversing demand declines – as we saw with scrappage schemes implemented during the 2008 financial crisis in North America – the success of any stimulus package will depend on the quantum of financial support from governments, the duration of such initiatives, and qualifying criteria for consumers.

Revised Global Automotive Outlook

The scale of distress to the automotive supply chain in the current crisis is unprecedented. A general lack of visibility, particularly on the lower tiers of the supply chain, means the weakest links will inevitably be revealed as production restarts and companies scramble to secure components. The most financially vulnerable are the smaller tier 2 and 3 suppliers, specialist tooling suppliers, and some logistics providers. As a result, our global 2020 base case sales growth estimate is around -20%.

As current FG stocks near depletion, future production planning will need to be revised to the new normal of lower demand. Although the adage ‘with every crisis there is an opportunity’ still rings true, things will be especially tough as the industry right-sizes and become leaner.

With efforts initiated by automakers and suppliers to consolidate, Counterpoint’s outlook remains cautious. Keeping in mind production already lost, the challenges in returning to work and the risk of prolonged low-capacity utilization from subdued demand, our revised global passenger vehicles sales outlook is around 72m units for 2020.

Exhibit 1: Impact of COVID19 on Global Automotive SalesCounterpoint:COVID19 Impact on Automotive Sales

Note: The nature of the current global health crisis means we cannot rule out further revisions to the global 2020 automotive forecast.

Author: Vinay Piparsania

Week 5: Digital Auto Retailing to Become More Widespread

Overview

Car sales have traditionally been a single, decentralised sales channel, i.e. automakers/importers sell cars to dealers, and dealers to consumers; COVID-19 is shifting some of this dynamic towards digital.

We have recently seen dealers ramping up their websites to help buyers select desired models, process payments and complete related paperwork.

Mercedes Benz has plans to convert 25% of its sales online by 2025, and long term, it is possible some automakers may adopt a Tesla-like business model by going fully online and removing the dealership from the equation.

However, we believe many car buyers will continue to want a brick and mortar experience, preferring to kick the tires and test drive before buying. Dealerships will continue to account for a vast majority of cars sold globally during the next decade.

The Tesla Model 

All Teslas are sold online and delivered to the customer’s doorstep. Company-owned showrooms are limited and located at high footfall places like malls. The purpose of the showroom is not to close sales, but to educate, display the product, showcase the latest technologies, and answer any customer queries. By removing franchise dealers from the buying process, Tesla is able to save on dealer commissions and control the overall buying experience. Maintaining closer contact with car-buyers not only enhances this, but also helps Tesla better understand customer expectations and communicate offerings.

Tesla is the only major automaker to have shown increasing sales during Q1 2020. An important factor behind the company’s performance was that its supply was less disrupted due to COVID-19 compared to competitors’, which depended on traditional dealerships. The success of the Tesla business model is expected to encourage other automakers to shift part vehicle sales online.

Exhibit 1: Factors Driving the Shift Towards Digital Retailing

Counterpoint: Factors Driving the Shift Towards Digital Retailing

Key Drivers of Online Sales

  • With most car sales in many countries happening online due to COVID-19, car-buyers are becoming more aware and accustomed to the idea of buying cars online. Dealers are enhancing their online selling capabilities and using unconventional ways to communicate with car-buyers, using Zoom calls and WhatsApp for instance. Initial industry feedback has been somewhat surprising, revealing an overall better buying experience via compared to walk-ins.
  • Growth of comparison and buying sites like Cars.com, Carvana and Vroom provide a wealth of information like availability, specifications, comparisons and video reviews to aid buying decisions. Price comparisons influence buying behaviour by helping consumers make informed decisions around costs.
  • The COVID19 pandemic has accelerated the shift towards digital retailing. Dealers lacking online capabilities are now partnering with third-party apps to connect and communicate with car-buyers online.

Key Hurdles

  • Automakers are bound by franchise agreements and many states do not allow direct selling by automakers.
  • Many state governments require in-person signature on the documents making full online sales impossible.
  • Many car-buyers prefer to evaluate the car in person and take it for a test drive before making a decision.
  • Arranging home test drives would add to extra time and costs for the dealers.
  • In many countries the e-commerce ecosystem is not developed enough to fully support online sales.

Conclusion

With social distancing unlikely to disappear in the foreseeable future, e-commerce will become an important buying channel for almost everything, including cars. Automakers and dealers are being forced to accept online sales or lose business. An online presence will soon become a ‘must have’ feature. However, dealerships and walk-ins will likely continue to account for the vast majority of car sales through the long term, mainly due to customer preference for test driving and seeing the vehicle in person.

Author: Aman Madhok

Week 4: Automotive Industry Creeping Forward

The COVID-19 pandemic continues to pummel the global auto industry, resulting in its one of the worst performing quarter since the financial crisis of 2008.

With governments having mandated various lockdown measures over the past few months, both supply and demand have been affected. Automakers in China, Europe, and the United States suspended plant operations, disrupting production, and consumer demand has waned as showrooms have closed and people shelter at home.

This week, while many production centers globally have announced extending shutdowns further into May, some automakers have also begun the process of re-starting manufacturing, albeit with caution.

Ensuring Enhanced Safety Protocols

Automakers and suppliers are taking the required steps for safe operations. These include things like temperature screening, daily health update questionnaires, reconfiguring of assembly lines to facilitate one-to-two-meter social distancing, and requiring the use of facemasks and gloves.

Some manufacturers are going beyond the requisite measures. Ferrari will offer voluntary blood tests to check for virus exposure, and FCA’s unions are proposing to move mealtimes to the end of shifts, allowing employees to avoid crowded canteens by clocking off 30 minutes early and eating at home or elsewhere.

Global Plant Openings

In the United States, several large automakers, including FCA, Honda, and Toyota, are aiming to restart production during the first week of May. In Europe, major automakers are hoping to begin building vehicles again in early May. Other automakers around the world are also publicly releasing opening dates, signaling to their suppliers when to ramp up for restart of production.

China Already Back to Business

In China, the initial epicenter of the outbreak and the world’s largest auto market, manufacturers in lockdown since late January resumed operations progressively from mid-February to early March; Volkswagen, Nissan, Hyundai, and Honda announced plant re-openings in mid-February, while General Motors, BMW, Toyota, and Volvo announced re-starting of plants from early April, including those in Wuhan province where the virus outbreak began. Volkswagen has managed to restart manufacturing at 32 of its 33 Chinese plants.

US Big Three in Re-Start Discussions with UAW

For the Detroit automakers, the United Auto Workers union (UAW) plays a critical role in deciding when and how plants will restart. Among the union’s primary concerns is to ensure members who report being ill will not be penalized for time away from work. The UAW has already supported GM and Ford’s efforts to launch the production of essential ventilators at their US plants – operations that have allowed the companies and the union to try out new safety protocols.

Ford, GM, and FCA are looking to restart some of their US plants in early May, and establish regular health protocols like screening, sanitizing, and social distancing. Production of Ford vehicles and engines is expected to resume during this period. Among others, Volkswagen has announced it will restart operations at its Chattanooga, Tennessee, plant. Volvo and Hyundai too hopes to restart work at its US plants by early May. Tesla is going to extend its factory shutdown orders through the end of May, following the extension of shelter-in-place orders in the Bay Area. Hyundai and Kia started operations of in their Alabama and Georgia on May 4.

 European Plants Returning to Normalcy

In Europe, an estimated one million jobs have been lost, with production losses at around two million vehicles. Several automakers have now started some limited production at their plants. Toyota resumed operations at its French and Polish facilities on April 22, after a month-long shutdown. Volkswagen restarted production in Zwickau, Germany, the first assembly plant in the country to restart operations. Audi restarted its engine plant in Gyor, Hungary on April 21. However, the luxury carmaker from the Volkswagen Group is yet to resume its car production in Germany. VW plants in the UK, Turkey, and the Czech Republic are likely to commence operations by early May. Jaguar Land Rover announced last Thursday it will gradually resume production at its Solihull facility in the UK, as well as its factories in Slovakia and Austria from May 18.

Hyundai has restarted output at its plant in the Czech Republic, while Renault has reopened its Portugal plant. The French carmaker’s Romanian facility is likely to resume operations soon. Volvo Cars announced its plants in Sweden and Belgium restarted work on April 20. Daimler’s contract manufacturer, Magna Steyr, restarted production of the Mercedes G-Class luxury SUV at its site in Austria last week. Italian sports car manufacturer Ferrari, one of the first carmakers to close its plant, is preparing to roll out cars from its Maranello facility in the next few weeks.

Indian Auto Industry Given Government Go-Ahead

Automobile, auto parts, and tractor manufacturers in the country have resumed operations after receiving due approvals from respective state authorities, conditional to following precautionary protocols such as social distancing and ensuring high standards of sanitization and hygiene.

Bajaj Auto, India’s leading 2W and 3W manufacturer, restarted operations this week at two of its plants, prioritising production of knock-down kits for export markets. Mahindra & Mahindra also commenced assembly at its tractor plant. Truck and bus OEM Ashok Leyland announced a partial production re-start.

In contrast, and despite having received necessary state approvals, Maruti Suzuki, India’s leading carmaker, has chosen not to resume production at its Haryana facility, as it wants to ensure both its own operational preparedness, and that of its entire supply chain.

Revised Global Automotive Outlook

Despite efforts initiated by automakers to resume manufacturing, Counterpoint remains cautious about the practicality, consistency, and effectiveness of these plans. Automotive supply chains are complex, and depend on many suppliers from disparate locations to be in sync. Shortage of even a single component can hold up an entire production line, resulting in inventory and cashflow backlogs. Unless the entire supply chain is up and running smoothly, vehicle production will remain challenging and constrained. Keeping in mind production already lost, extended lockdowns, challenges in returning to work, and the anticipated subdued demand, we have this week further downgraded our global sales outlook to around 73m units in 2020.

Exhibit 1: COVID-19 Impact on Global Automotive Sales, 2020Counterpoint: COVID19 Impact on Global Automotive Sales in 2020

Author: Vinay Piparsania

Week 3: New Health and Safety Features to Come in Cars

Safety features in cars have long been considered critical and fitment mandated by policy continues to progress in this area. The COVID-19 pandemic now brings new health considerations and preventative features to the fore.

Counterpoint Research sees a rising trend over the next few years around health-related features being requested by car buyers – especially amongst vulnerable older age groups, those spending considerable amounts of time in their cars, and drivers and passengers of shared mobility and other public transport options.

Emerging Health and Safety Features in Cars

Preventive health and safety features currently offered by popular automakers as well as those under development are outlined in the exhibit below.

Exhibit 1: Emerging Health Features in Cars

Counterpoint: Upcoming COVID19 Specific Health Features in Cars

COVID-19 Specific Safeguard Features

Recent features developed by OEMs specifically for preventing the ingress of virus and bacterial contagions like COVID-19 include the following:

  • An N95 certified Intelligent Air Purification System which prevents bacteria and viruses from entering the car’s interior environment has been introduced by Geely Motors in China. The OEM is also developing self-cleaning and anti-bacterial surface treatments for commonly used touch points like grab handles.
  • Jaguar Land Rover (JLR) is working on adding a special ultraviolet (UV-C) light sanitizing unit as a part of future models’ HVAC systems to kill germs, bacteria, and viruses.
  • MG Motors recently partnered with Singapore-based Medklinn to explore areas related to car cabin and surfaces sterilisation. Car sterilisation is also gaining popularity in the used car market and workshops.

Given the current climate, these recently introduced health features could prove to be a key consideration for customers, all other things being equal. For instance, clean-air filtration systems are already popular, driven by a growing awareness around rising pollution levels. Additional safeguards combatting bacteria and viruses could further improve brand image by conveying innovation, safety and customer centricity.

With the continued spread of COVID-19, we expect other OEMs to follow in the footsteps of Geely Motors, JLR and MG Motors in the introduction of similar health features, though much is currently unknown about the spread of COVID-19 and efficacy of new features will need to be proven.

Other prevention-related growth areas include aftermarket products of car disinfectants and anti-bacterial seat covers.

Non-Embedded Connected Car Health Applications an Emerging Revenue Opportunity

While embedded health systems fitted as original equipment will add to development time and costs, non-embedded connected services (via smartphones, wearables, and personal devices connected to car infotainment systems) can be implemented more quickly and cheaply. These types of applications can become an alternative alert system for drivers, providing important information on things like hospital locations and infection hot spots as well as enabling general health-related services. Increasing consumer awareness around healthy lifestyles may boost the popularity of such apps, opening potential revenues streams for stakeholders across various sectors.

Exhibit 2: Non-Embedded Connected Health Services Key Stakeholders Counterpoint: Ecosystem of COVID19 Related Health Services

Author: Aman Madhok

 

Week 2: Vehicle Sales Tracking Severity and Subsiding of Outbreak

Global Update

With almost all countries having initiated varying levels of COVID-19 lockdown measures in March, a significant decline in global vehicle sales for the month was to be expected. Sales numbers from key markets confirm the impact, tracking the growing severity, as well as subsiding, of the COVID-19 outbreak.

Exhibit 1: Global Automotive Sales, M Units

Counterpoint: COVID-19 Automotive Sales Forecast by Region

US

With automotive production having stopped mid-March, US car sales for the month have dropped by over 39% YoY to around 1m units, the lowest volume for March in over a decade.

The biggest losers in relative volume terms are Chevrolet, followed by Toyota, Nissan, and Honda which have declined by over 60,000 units each.  In most states, however, sales figures for the first week of March were relatively normal, so the reported figures may not yet provide an accurate picture of the full virus impact. April and May will continue to be dismal in light of extended lockdowns, counterpoint expects full year US sales forecast to 13.9m units.

China

Day-to-day life is now reportedly gaining some normalcy in China, with auto plants cautiously resuming manufacturing operations and consumers slowly coming back to showrooms. Most dealers, however, continue to face inventory shortages; the Honda-Guangzhou JV plant in Wuhan is currently operating overtime to meet demand.

According to the China Association of Automobile Manufacturers (CAAM), car sales declined 42% YoY in 1Q20 largely on the near 80% drop in February, which saw only 310,000 unit sales. Overall, the Chinese automotive market remains weak and fragile, with last month having seen 1.3m vehicles sold, a 46% decline over March 2019.

In a normal year, China would have sold more than 6m new cars in the first quarter; this year, the figure is around 3.6m.

As automakers restart production, boosting demand is now the industry’s main priority. The government has announced cash incentives to stimulate demand and support the industry’s recovery. Several metro cities and provincial administrations are offering cash subsidies of as much as $1,400 per vehicle.

Earlier in April, Beijing announced extending subsidies and tax breaks for new energy vehicles (NEVs) for two more years. It is now evident that electric vehicles have suffered more than the broader market. In March, only 53,000 NEV cars were sold, less than half compared to a year earlier.  It should be noted, however, this number excludes Tesla, which is pushing hard to deliver to its Chinese customers resulting in some replacement effect.

In any case, while the car market may rebound slightly in the second quarter, it is unlikely to sustain nor be able to make up for the first-quarter losses. Counterpoint Analysts are holding to their estimates that China’s auto sales decline this year will be approaching double digits, close to 9%.

South Korea

The one bright spot in the global auto market is South Korea.  The country saw its domestic industry – comprising of Kia, Hyundai, Renault-Samsung, GM Korea, and SsangYong – bounce back nearly 10% in March after seeing big declines in February, when it was down nearly 20% YoY, on automaker shutdowns. 

Europe

The situation in Europe remains critical. With Spain and France having gone into lockdown in mid-March, new vehicle sales fell by almost 70% in each market. Sales in Germany, the largest market in the region, dropped by nearly 40%. In the UK, where March is traditionally the strongest selling month with new number plate series being registered,  passenger cars and SUV sales declined nearly 45%. Figures for Western Europe as a whole showed an over 50% sales decline in March.

Counterpoint Analysts expect April sales to be far worse, with lockdowns remaining until at least the end of the month, and likely into May.

Exhibit 2: COVID-19 Impact on Global Automotive Sales, 2020

COVID19:Automotive Sales Forecast 2020E, Counterpoint

Note: The unprecedented and unpredictable nature of the current global health crisis means that we cannot rule out further revisions to the global 2020 automotive forecast.

Author: Vinay Piparsania

Week 1: Current Status and Upcoming Challenges

Recent Developments

US: The US is the new epicenter of COVID-19, where automotive production has entirely stopped with automakers GM, Ford and FCA not announcing any specific dates for reopening their plants. Other automakers Honda, Toyota, and Hyundai plan to open their plants by mid-April, however, considering the situation in the US, these automakers too are expected to extend the shutdown.

China: Life continues to gain normalcy in China. Automotive plants have started to resume operations, and footfall is increasing in showrooms. Most dealers, however, are facing inventory runouts and car shortages. The Honda-Guangzhou JV plant in Wuhan is currently operating overtime to meet demand.

Europe: The situation remains critical in Europe. According to the European Automobile Manufacturers Association (ACEA), the EU-wide production loss now stands at over 1.5 million vehicles, with an average of 18 working days.

Exhibit 1: COVID-19 to Lead Global Automotive Industry into Recession

Counterpoint: Coronavirus impact on global automotive growth

Long Term Impact

The COVID-19 impact to the global automotive industry will linger for the next few years:

Exhibit 2: Current and Future Impact of COVID-19 on Automotive Industry

Counterpoint: COVID-19 Upcoming challenges for automotive industry

Regional Growth

  • China will recover the fastest considering the sustained steps to curtail the virus from resurging, growing indication of normalcy, and the inherent latent demand for vehicles.
  • Historically, Europe has taken more time over economic rebounds compared to the US. For instance, it took European economy over eight years to rebound to the pre-2008 financial crisis level.

Each country will have its own economic recovery packages, incentives, and policies to boost consumer demand. Automakers will need to recalibrate sales and launch strategies, depending upon the recovery timeline of each country.

Cash Crunch

Early April, Daimler has signed up to a new US$13 billion credit line with banks, improving on its financial flexibility. In March, Volkswagen CEO Herbert Diess had announced that plant shutdowns were costing the company US$ 2.2 billion per week. Small suppliers, who do not have much financial buffer, are expected to suffer most amid plant shutdowns. Many of them will need to close if the shutdowns extend beyond a couple of more weeks. While automakers continue to incur costs such as salaries and debt repayments, sales are seeing a steep decline, impacting revenues. We expect most economic relief packages will be in the form of loans (instead of grants), leading to more highly leveraged balance sheets for the coming years.

A Shift in Sourcing Strategy

Having experienced severe supply disruptions during the last few months with an over dependency on China as a manufacturing base, automakers will review their supplier strategy across geographies, and possibly rely more on indigenous suppliers. Japan has earmarked US$2.2 billion to help companies shift manufacturing base from China to Japan, and US$214 million to other countries.

Product Development Delays

Product development cycles and new model launches will be delayed due to the financial challenges and supply chain disruptions. The spend on R&D may likely be reduced as automakers look to conserve capital. Investments in new technologies, like autonomous vehicle, will be deferred. On April 7, GM announced postponing launch of updated models – Chevrolet Equinox, Silverado, and Bolt EV, as well as the GMC Terrain, Sierra, and Cadillac XT4 in the US to year 2022.

Regulatory Changes

Emission norms could be relaxed for automakers to cope up with declining sales. Automakers are already lobbying European Commission to delay the introduction of stricter CO2 norms. During the recession in 2008/9 the governments in the US and Europe implemented scrappage schemes to encourage consumers to replace older vehicles and inject spending into the auto sector. Counterpoint expects the return of similar schemes, with escalating rebates for the most fuel-efficient cars such as full electric.

Author: Aman Madhok

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