Weekly Update: COVID-19 Impact On Global Automotive Industry

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Week 17: Car Subscription Services Get COVID-19 Push

The shift towards car subscription services, which started during the last few years, is only going to accelerate during the COVID-19 pandemic. Rising awareness about health among car- buyers is making them consider personal vehicles over public transport, with subscription payment models making vehicle ownership more accessible. This blog analyses the key drivers for subscription-based models and the role of COVID-19 in pushing this shift.

Why Subscription?

  • Automakers are looking for new ways to push sales and make cars more accessible for customers in the wake of COVID-19 pandemic, which has put a lot of strain on their purchasing power.
  • There is a generational shift towards a shared economy where everything from OTT to consumer electronics is being subscribed to. In mobility too, millennials are moving away from car ownership to shared mobility.
  • Rental companies are offering flexible subscriptions ranging from 1 to 36 months and attractive schemes, like extended loan tenure, low down payment, no EMI for a year, return assurance and home delivery, to push sales.
  • During COVID-19, dealers have shifted online to provide a quick, streamlined and hassle-free buying process, thus aiding in subscription sales.

Counterpoint: Key drivers subscription car sales

Automakers Taking Subscription Seriously

Counterpoint: COVID-19 automakers key subscription schemes

While subscription services, including Volvo’s Care, Ford’s Canvas, Cadillac’s Book Porsche Passport and Mercedes-Benz’s Flexperience, were already available, more automakers are focusing on such services during COVID-19:

  • India’s largest car manufacturer Maruti Suzuki has partnered with ORIX to start a pilot subscription model for new cars. Hyundai, the second largest player in the country, started its subscription service in 2019.
  • In March, Nissan launched the ClickMobi car subscription services in Japan. The service is currently available in 23 of Japan’s 47 prefectures. The company plans to expand it to the whole country by September.
  • In January, Toyota launched the Kinto subscription service across Europe. This includes Kinto One, a subscription-based service for new cars.
  • In July, JLR launched the Pivotal vehicle subscription schemes in the UK, offering a six-month subscription starting at $934 a month for a Land Rover Discovery Sport or Range Rover Evoque. JLR expects subscription services to account for 10% of all car sales in the US and Europe by 2025.
  • Volvo, which launched its subscription service Care in 2017, expects it to account for 50% of its revenues by 2025.

 Mushrooming start-ups

Many start-ups, including ZoomCar and Revv, are collaborating with automakers and dealers to provide the software platform, schemes and expertise for subscription-based models. Third-party collaboration is helping automakers and dealers in a fast scale-up of their subscription offers.

  • In July 2020, a London-based car subscription start-up secured €22.6 million in funding. The company provides subscription-based car buying in the UK in partnership with automakers including BMW, VW and Mercedes Benz.
  • Australian start-up Loopit (earlier known as Blinker), which has around 500 dealerships on its software subscription platform, announced 52% increase in dealers wanting to integrate into the platform during the country’s initial lockdown period.

Conclusion

  • In the short term, COVID-19 will accelerate the shift towards subscription models as car buyers refrain from lumpsum payments on big-ticket purchases. The need for privacy and social distancing will also push them towards such services.
  • In the long term, shift towards a shared economy and growing competition from ride-hailing services will continue to encourage automakers to adopt subscription models to push car sales.

Author: Aman Madhok

 

Week 16: Need for more resilient supply chains

The COVID-19 pandemic has demonstrated how vulnerable automotive supply chains are to disruption, bringing under scrutiny the extended global supply strategies.

The abrupt closure of production centres in China and its domino impact, causing widespread chaos among global auto manufacturers, were felt progressively in Europe, the US, India and South America. Having offshored their manufacturing activities to low-cost countries, many automotive OEMs and suppliers are now scrambling to establish shorter or localised regional supply chains.

The drive to shorten supply chains

Even months before the COVID-19 outbreak, there was a growing interest among global automakers to localize manufacturing of critical components. Trade tensions were at their peak with the escalating tariff war between the US and China, resulting in a broader nationalistic spirit arising in some other countries too. The intensification of protectionism, through targeted financial trade barriers, had become a real and present threat for multinational auto operators to deal with.

With globalized supply chain networks currently programmed for the lowest possible price, most Western companies had set up centralised manufacturing facilities in lower-cost economies, where final products are assembled competitively and shipped to higher-income markets. Automakers, in particular, source parts and electronics from China, mainly because they are cheaper. However, rapid political developments, natural disasters and now the global pandemic have revealed the inherent weakness at the core of such a model of offshore manufacturing. For example, when the pro-Brexit (UK’s decision to leave the European Union) vote was announced in 2016, European auto OEMs and suppliers immediately planned for the worse and rushed to invest in new supply chain resources in the UK. While a change towards more flexibility and multi-level sourcing by the global auto industry had already begun cautiously, the COVID-19 impact has now made it a more definitive and urgent course of action.

Over the next few years, Counterpoint analysts expect to see a broad overhaul of the global automotive supply chain infrastructure based on the following trends:

Globalization to regionalization

Currently, most leading global automakers source 30% to 60% of their parts from China, including modules and sub-assemblies. Given the incredibly high number of parts required – each with different lead times – a return to regional supply chains does present an incredibly complex challenge. However, that challenge is being considered worth taking on by stakeholders for a post-COVID world.

Intending to establish alternative, flexible and adaptable supply chains — while mitigating single-source vulnerabilities – OEMs, component manufacturers and auto sub-system assemblers are now looking to strategically source, assemble and deliver from within their regional borders, and are also reconsidering setting up regional logistic hubs.

Counterpoint: COVID-19 need for resiliant supply chain

 Fundamentally rethinking the supply chain

COVID-19 has exposed the weaknesses of a globalized manufacturing system, necessitating a fundamental rethink of existing supply chain operations. The distributed global business model, being primarily driven by an objective to achieve minimum cost, needs to be resilient. Supply chain models will need to be reconfigured, based on business optimization. Modifying the supply chain as a key business driver and bringing back timely human oversight are some critical factors that can bring inherent agility.

With volatility in production volumes and schedules expected to be a norm, suppliers and logistic operator chains will have to be adaptive, and be able to recover quickly from major natural and man-made catastrophic events such as earthquakes, floods, fires, industrial strikes and social unrest. Human overrides and protocols will need to be re-introduced to bring stability back to the global supply chain during such a crisis. As the current pandemic stress-test has demonstrated, large variances and disruptions cannot be managed through statistical and algorithmic models with such unusual events typically disregarded as “outliers” and overlooked in operational programming.

Resilience through re-shoring — easier said than done

Despite the pain caused by production losses, the business case for increasing supply chain resilience is not straightforward. Reconfiguring and reducing the length and complexity of global supply chains is not without its challenges. Inevitably, short-term costs will be a consideration, as well as the ability to recruit new staff with the requisite skills, knowledge and experience, and access to adequate capital.

With thousands of suppliers involved in a vehicle’s value chain, diversifying suppliers to increase resilience involves significant investments and recurring costs. Automotive components are typically sophisticated, intricately engineered, bulky and also fragile, with high logistics and transport costs. In most countries, government policies encourage sourcing from local producers by achieving a local content threshold to qualify for reduced import tariffs. However, even if such suppliers are considered as alternatives, they are required to be tooled, trained and resourced to produce to specifications and quality standards.

Nonetheless, the benefits of shortening supply chains are considerable, specifically greater security and increased resilience to causes of disruption. Although COVID-19 has brought these into focus, it is not the only risk to established OEMs. There is the ever-present threat caused by natural and man-made events, the ongoing trade disputes and tariff wars between major trading nations, and political instability in regions that supply critical raw materials, combined with a rise of nationalism and protectionism around the world.

The current configuration of international supply chains relies predominantly on low trade barriers and assurances that they will remain for a reasonable time period.  Unfortunately, the devasting economic impact of COVID-19 has led to a resurgence of protectionist sentiments in most countries, and a highly probable threat of such benign policies being withdrawn. Further, the economic arguments for offshoring are not as persuasive as they used to be, with average wages in China’s manufacturing sector, for example, having increased over countries such Brazil or Mexico

There could be many other significant factors behind re-shoring decisions too, such as access to qualified personnel, skills, technology and innovation. Proximity to primary markets is another key consideration, as well as improved quality. OEMs look for quality at the most competitive cost. One of the advantages of working with local suppliers is their ability, if set up correctly, to deliver both. Working with localised suppliers also reduces challenges associated with communicating across multiple time zones, languages and cultures.

Among the deciding factors will be the types of components or aggregates being produced, along with market demand, speed of response and ability to supply custom-engineered solutions with short lead-times.

Conclusion

The sheer number of suppliers to the automotive industry, who are currently clustered in specific regions of the world, present major obstacles to diversifying risks. Reducing or expanding the number of suppliers is not necessarily the only way to configure resilient supply chains.

Counterpoint Research believes that ultimately we will see a combination of traditional extended supply chain models with a growing alternative network of short and localised supply chains. The latter network will most likely be established in alliance with specialised suppliers that can deliver components and services, and have the capability to adapt resiliently to changes in market conditions.

Author: Vinay Piparsania

 

Week 15: Financial Crunch to Promote Alliances in Auto Industry

With most automakers remaining certain about their shift towards emerging mobility options, strategic partnerships and alliances can ensure their leap forward while maintaining a competitive advantage in these disruptive times.

Mobility options involving electric and autonomous vehicles require billions of dollars in investment. With automakers currently facing a severe financial crunch, the need for partnerships and alliances has become more relevant and urgent.

Below are some recent developments and measures taken by global automakers to ensure liquidity to manage their day-to-day operations:

  • Daimler recently secured US$13 billion credit line from banks.
  • Ford secured US$15 billion from existing credit lines and $8 billion from unsecured bonds.
  • Volkswagen has announced losing US$2.2 billion per week due to plant shutdowns.
  • French government will provide US$8 billion (EUR7-billion) bailout to PSA and Renault.

With the financial crunch leading to automakers and suppliers re-allocating capital funds to manage operations in the short term, Counterpoint expects investments to recover slowly post-COVID-19 and after operations become stable again. The table below ranks different strategic mobility opportunities in terms of their short-term investment potential, with comments on the probable partnership/alliance outcomes.

Counterpoint: COVID-19 new mobility investments

Electric cars

Investment drivers

With the automotive industry being a key GDP driver in many countries, governments will look at promoting EVs to meet their overall emission targets (Paris agreement) on the one hand while driving economic recovery and employment on the other.

Partnership scenario

A key area of partnerships includes EV batteries.

  • Securing supplies: Automakers will need to ensure their battery supplies are secured by partnering with large-scale global battery companies like CATL and LG Chem.
  • Saving R&D costs: Automakers will consider partnering with battery companies to develop energy storage technologies, saving or sharing costs.

Connectivity

Investment drivers

  • Social distancing: Car buyers are preferring connectivity services like over-the-air (OTA) updates, predictive maintenance and touchless transactions, and looking to restrict their visits to service centres to maintain social distancing.
  • New revenue avenues: OEMs are looking at value added connected services as an important area for generating additional revenues and shoring up profit margins amid declining vehicle sales.

Partnership scenario

There will be increasing partnerships across the ecosystem and supply chain — between automakers, telecom operators (to provide connectivity, subscription plans), TCU players (to provide the hardware) and software companies (to develop apps)

Shared mobility

Investment drivers

  • Work-from-home options to employees are expected to become permanent for many companies moving forward, potentially leading to a surge in short-distance travel
  • Amid the economic downturn, choices for last-mile and personal transportation will need to be economical. Hiring e-scooters, e-bikes and kickboards comes at a significantly lower cost when compared to owning a personal vehicle.
  • Maintenance of social distancing is encouraging people to avoid public transport, boosting take-up of shared e-scooters and e-bikes.

Partnership scenario

  • Acquisitions: There are more chances of acquisitions rather than partnerships in this market. With cashflows for small and medium companies remaining stressed, they are suitable targets for acquisition by big companies like Amazon at lower than the valuation price. Intel’s recent acquisition of Moovit, a mobility-as-a-service (MaaS) provider, for $900 million signals the possibility of similar acquisitions in the sector.

Autonomous vehicles

Investment drivers

Partnership scenario

  • There will be relatively fewer alliances (at least in the short term and compared to 2019) among stakeholders for advance autonomy (Level3+) as automakers try to invest in technologies with relatively faster RoI, and avoid cost on new technologies which are not proven and riskier to invest in.

Conclusion

While COVID-19 will delay immediate investments in new mobility, market drivers will continue to encourage investments in the long term.

Alliances and partnerships will become important tools for automakers to gain a competitive advantage. However, the nature of alliances will vary for each mobility type.

Author: Aman Madhok

 

Week 14: June Update – Global passenger vehicle demand to decline over 20% this year

COVID-19 continues to have a profound impact on the global passenger vehicle (PV) industry. As markets around the world move into H2, there are some varied signs of recovery visible, as well as of further turbulence ahead. Uncertainties remain, with COVID-19 infections rising in several countries of Asia and South America, and, most alarmingly, in the US.

Even as China was showing encouraging signs of a possible V-shaped recovery, June sales slipped significantly, indicating a bumpy ride ahead. The US industry too, despite having turned in some encouraging numbers in May, retreated last month. Europe, the UK and India remained sluggish and stuttering, with sales volumes expected to be under last year’s by over 25%, while South Korea remains a bright spot, tracking ahead on a year to date basis in June.

With the risk of further virus spread and preventive lockdowns remaining high over the rest of the year, Counterpoint analysts continue to remain cautious in holding to their earlier PV global sales forecast.

China

Based on recent numbers released by the China Passenger Car Association (CPCA), sales in China have significantly dropped in June, despite encouraging recovery trends demonstrated over May and April. Passenger vehicle sales came in around 1.68 million units in June, a 6.5% YoY decline. May sales had risen over 12% YoY to 2.1 million vehicles, and almost 4.5% YoY to 2 million vehicles in April.

The June decline is a setback for an industry expecting to see a rebound in demand with the pandemic having been brought under control in the country, and showrooms and retail markets reopening for business. Evidently, the auto industry’s long-term dependency on a broader economic recovery in China and on overcoming already established consumer mobility trends, such as preferring ride-hailing options and putting off purchase decisions, remains.

Sales of new-energy vehicles (NEVs), including electric cars, also continue to decline. NEV sales in June fell 35% YoY to 85,600 units, following a drop of 26% in May and 30% in April. After growing rapidly for several years, electric car sales have lost momentum, with the government rolling back subsidies in mid-2019 and prevailing lower oil prices making typical internal combustion engine (ICE)-powered vehicles more economical to operate. Electric vehicles (EVs), however, remain a priority for China and authorities are considering fresh stimulus measures to support their recovery.

Bucking the trend, Tesla accounted for nearly 23% share of electric car sales in June. The American company, which started production at its greenfield Shanghai factory at the beginning of the year, has rapidly achieved market leadership and boosted monthly EV registrations in China. Counterpoint analysts are monitoring Tesla’s rise in China and the impact its operations and popularity are having on other domestic EV manufacturers.

 United States

In June, COVID-19 cases saw a spike in some key US states, including California, Texas and Florida, triggering fresh curbs on movement of citizens and resulting in some strong headwinds for the country’s PV sales. With more social restrictions and lockdowns likely to be introduced over the weeks ahead, recovery prospects for the US remain fragile.

Counterpoint analysts are holding to their earlier forecast of an over 24% annual decline for 2020, at around 13.4 million units.

On a positive note, Tesla’s market capitalisation now exceeds Toyota’s, making it the most valued carmaker in the world and underscoring its sustained global EV sales momentum over the pandemic period.

 Europe

In Europe, we are beginning to see some improvement in vehicle markets, propped by a combination of pent-up demand and various government subsidy programmes encouraging drivers to trade in older cars for new ones. In France, car sales rose for the first time this year in June, recovering by 1.2% YoY to just under 234,000 units. Following France, Germany and Spain too have introduced similar incentives for their auto industries.

The UK car industry has also demonstrated signs of improvement in June, boosted by the reopening of more showrooms. According to reports of the Society of Motor Manufacturers and Traders (SMMT), June registrations fell 35% YoY to 145,377, an improvement over prior months when YoY demand fell by 89% in May, 97% in April and close to 45% in March. While car showrooms in England reopened at the beginning of June, dealers in Wales and Scotland were allowed to do so only from near the month end.

Notwithstanding the signs of a small rebound, Counterpoint analysts remain cautious. European and UK consumers are wary about buying high-ticket items like cars, given the uncertainty over the economy and their job security.

 Rest of World

South Korea remains a bright spot in Asia, with domestic production and sales rebounding in June by over 41% YoY to 176,468 units.

In India, while leading automakers like Maruti Suzuki, Hyundai and Mahindra ramp up production and demonstrate incremental wholesale shipments month on month, sales remain a far distance from the pre-COVID-19 levels. June wholesale volumes for each of these automakers show an over 50% YoY decline. While PV production schedules for July may be higher, disruptions to the supply chain on account of COVID-19 induced restrictions and manpower availability continue to challenge their manufacturing stability. On the other hand, tractor and two-wheeler sales have seen a sharp recovery in June, led primarily by rising rural demand and resumption of movement of goods following progressive easing of lockdowns across the country.

Revised Global Automotive Outlook

While some varied signs of recovery have begun to emerge in June, Counterpoint Research remains cautious and is holding to its earlier global automotive sales outlook of around 72 million units for 2020, a 20.1% decline from 2019.

Counterpoint: COVID-19 impact on global automotive market

Author: Vinay Piparsania

 

Week 13: COVID-19 Impact on EVs

Overview

Counterpoint expects electric vehicles (EVs) to weather the pandemic storm better than the conventional vehicles due to the commitment of governments to meet their overall emission targets. The impact of the pandemic in 2020 will differ across regions. China will recover the fastest due to its control on pandemic spread and pro-EV policies. In longer term, the impact of the pandemic will be minimal and EV sales will be driven by government regulations and incentives. Despite slower recovery in Europe, the investment in the region is expected to remain strong in the long term, driven by strong regulatory tailwinds. Long-term demand in the US will be the lowest if the emission norms remain lenient and the oil prices remain low.

United States

The COVID-19 impact on the US EV market has been limited due to strong sales of Tesla during Q1 2020. Plant shutdowns during the March-May period have started making impact on all OEMs including Tesla, which reported 5% YoY decline in deliveries during Q2 2020.

The EV sales in the US will be hit hard by COVID-19 and see a slower growth in the coming years:

  1. In January 2020, the administration rejected GM’s and Tesla’s plea seeking extension of the $7,500 tax credit qualification to cover three times the initial 200,000-EV threshold per automaker. The government did not increase the threshold. On the contrary, it reduced the tax credit to $7,000.
  2. Protracted legal battles between Zero Emission Vehicle (ZEV) states and the central government will continue to adversely impact EV sales in the US, at least for the next couple of years. Cash-strapped automakers will be encouraged to invest in profitable vehicles like gasoline trucks and SUVs.
  3. Low crude oil prices (which fell to -US$37.6 in April) will encourage car buyers to stick to gas fuelled cars.

China

Chinese government has taken positive steps in 2020 to revive the demand for new-energy vehicles (NEVs). It is expected that the government will continue to support NEVs with sales mandates and subsidies driving the market.

  1. In April 2020, China scrapped vehicle purchase tax on NEVs, effective in 2021 and 2022, and broadened the scope of the exemptions to include all NEVs.
  2. The NEV subsidies were supposed to end this year. However, during the same month, the government announced to extend the subsides to 2022, with a slower phase-out pace.

NEV sales during the January-May period crossed 260,000 vehicles, declining 44% from last year. However, sales decline continues to drop with each passing month as the pent-up demand is released and business activities comes to normal. Counterpoint expects a strong H2 2020 for EV sales in the country compensating for the demand lost during H1 2020.

Europe

The European car sales increased around 90% during January-April 2020 compared to last year due to following reasons:

  1. 2020 is the target year for EU CO2 emission standards to limit average CO2 emissions per kilometre per new car sold
  2. Germany increased the EV subsidies in February, boosting demand in the region
  3. Italy’s move to introduce incentives worth €60 million in 2019 and €70 million in 2020 and 2021 started to have its impact on sales

The impact of the pandemic will be diluted during rest of the year as OEMs focus on meeting their emission targets. It is likely that the governments will respond to the pandemic by increasing subsidies and incentives for EVs to meet emission targets, boost economic growth and generate more jobs. The proposed US$22.6 billion (€20 billion) package for two years for clean vehicles, with 2 million electric and hydrogen vehicle charging stations to be installed by 2025, is a step in this direction.

Counterpoint: COVID19 Impact on EV sales

Author: Aman Madhok

 

Week 12: Micro mobility – Silver linings amidst the pandemic?

Overview

Micro mobility globally has been severely impacted by COVID-19 with lockdowns resulting in reduced ridership. The road to recovery is a tough one, but Counterpoint believes micro-mobility will be the biggest beneficiary from COVID-19 among all forms of shared mobility.

Citizens and governments in many cities are becoming increasingly aware of the benefits of micro-mobility, and companies should prepare for coming opportunities to not only survive, but to grow over the long term.

Counterpoint: COVID19 Impact on Micromobility

Key indicators showing potential for rebound as lockdowns ease:

  • Changing customer preferences – businesses are realising productivity is not an issue. In fact, it has increased in some cases as employees work from home. This is expected to become permanent for many companies moving forward, leading to a surge in short distance travel. People are more likely to choose quick and eco-friendly e-bikes and e-scooters as they travel short distances around their home rather than taking long commutes.
  • Amidst the economic downturn, choices for last mile and personal transportation will need to be economical. E-scooters, e-bikes and kickboards are significantly cheaper than owning a car.
  • Concerns around social distancing will encourage people to avoid public transport, boosting take up of shared e-scooters and e-bikes. In China, bike share operators like Hellobike, Mobike and Didi Chuxing are seeing good growth after easing of lockdowns, as people reduce dependence on public transport.
  • Lockdowns have resulted in less pollution, increasing environmental consciousness amongst the general public. This is expected to benefit the sector in near future. Indeed, high pollution levels in many Chinese cities have boosted the profile of the sector, making bicycles and e-bikes an important mode of last mile transport.

Government support

To aid social distancing, governments are considering infrastructure investments to help the micro-mobility sector to grow.

  • The UK government is urging people to avoid public transport and instead use private vehicles, bicycles, or walk. It has announced an initial £250m (US$306m) emergency active travel fund (the first stage of a £2bn investment commitment) for EVs, cycling and walking infrastructure. Buildout of E-scooter trails in the country will be brought forward to 2020 from 2021. Pop-up bike lanes, wider pavements and safe junctions will be a part of the fund. £10m (US$12.2m) from the fund will be committed to street EV charging infrastructure.
  • Bogotá, Colombia has added 47 miles of cycling lanes to accommodate more riders and aid in social distancing. Cities such as Mexico City and London are benefiting from the current cycling infrastructure.
  • Other cities have blocked some roads to traffic, providing more space for pedestrians and facilitate social distancing. For instance, Oakland, California has restricted traffic on 74 miles, or 10%, of its roads, helping pedestrians and cyclists keep at least six feet apart.

Green shoots

As lockdowns ease, some e-bike companies are already seeing an increase in demand.

  • E-bike maker Vanmoof, which secured funding of $13.5m in May 2020, saw sales increasing 48% YoY during Feb-March period, and over 20% for the Jan-May period.
  • UK-based foldable bike manufacturer Brompton announced its online sales increased five-fold since the launch of the ‘Direct To Home’ service from the start of April.
  • E-bike sales in Germany have seen a significant increase from April with the easing of lockdowns, creating a shortage of e-bikes in many cities.

Challenges

  • The global micro-mobility market recovery will likely start in 2021, or as we see stabilization in COVID-19 cases. A second wave of infections could delay the recovery further.
  • Most micro-mobility companies are relatively small and localized start-ups, with many already seeing losses before the pandemic started. The market will see consolidation as cashflow continues to tighten. Intel’s recent acquisition of Moovit, a mobility-as-a-service (MaaS) provider, for US$900 million signals the possibility of similar acquisitions in the sector.
  • E-bikes, e-scooters and kickboards are still illegal for travel on roads in many cities. Further, there is a lack of standardization for these types of vehicles.

Recommendations

  • Governments can play a pivotal role in the adoption of micro-mobility. The recovery will vary from country to country depending on favorable government policies, subsidies and infrastructure development.
  • Measures such as self-sanitizing handlebars, onboard sanitizers and periodic cleaning of vehicle fleets will become important to attract riders.
  • Innovative schemes and discounts can help micro-mobility companies through the tough times. For instance, two-wheeler sharing company Bounce is offering its bikes on a weekly and monthly subscription basis.

Utilization of existing vehicle fleets into logistics and food delivery can open up new revenue streams for micro-mobility companies. For instance, two-wheeler sharing company Rapido is looking to earn 25% of its revenues from logistics moving forward.

Author: Aman Madhok

 

Week 11: US May sales – Is the worst over?

Actual passenger vehicle (PV) sales reported for the US in May suggest the domestic auto industry could be on its way to recovery.

Reported May sales for PVs and light trucks came in at around 1.1m units, down 33% YoY but an improvement over April and March’s respective 45% and 38% declines. Further, breaking the 1m monthly mark for the first time this year, May volumes showed significant improvement over the 350,000 units sold in April, with light trucks being a bright spot.

US auto sales on the rebound

May is traditionally a critical month for the US auto industry as it marks the beginning of the summer sales season. With almost all states having eased COVID-19 restrictions, most automakers in the country have reported sales rebounds during May.

Monthly sales declined over 30% YoY for General Motors, Ford, and FCA. Leading Korean carmaker Hyundai saw a 13% YoY decline, a 5% pt improvement from April. Honda saw a May YoY sales drop of 17%, with trucks performing much better than cars – down 10%  and 25%, respectively. Toyota reported a YoY sales decline of 26%, May’s unit sales were almost double that of April, which fell 56% YoY.

It is possible April could be the low point in a possible V-shaped recovery, with states re-opening and dealerships returning in May. The month has shown significant sales improvement and recovery, highlighting pent-up demand. As well, extraordinary promotional offers by dealers and automakers alike have brought consumers back to showrooms and encouraged buying.

Counterpoint believes that May’s sales pace, while lower than last year, is indeed the start of recovery for the industry. Automakers are already scrambling to replenish inventories as customers return to showrooms. However, there is still a long road ahead, and we will continue to track the market over the coming weeks.

Production hiccups stalling assembly lines

As many states across the country eased shelter-in-place restrictions during the month, May also brought attempts by auto OEMS looking to return to normalcy with restarts at their assembly plants.

However, supply chain issues continued to plague production lines at major auto plants, as they faced problems from suppliers in Mexico. While most plants in the US and Canada restarted by mid-May, most manufacturers in Mexico had not resumed operations even by the end of the month. Given the inter-dependency of the North American automotive supply chain, most plants in the US continue to face parts shortages, resulting in sporadic production operations. It may still be a few months before we see some stability.

Counterpoint estimates prolonged plant/supplier shutdowns have resulted in the loss of nearly 3m units of vehicle production in H1. Anticipating slower line-speeds and reduced demand over Q3 and Q4, we expect full-year 2020 output losses to increase to over 3.5m units, a 22% decline from last year.

In any case, with automakers already concerned about record low inventories at dealerships, carmakers have been looking to continue working over normally planned shutdowns in summer.

Keen on riding the wave in customer demand, especially for light trucks, General Motors has called off its traditional two-week summer shutdown and will continue to produce vehicles at most of its North American plants.

Similarly, Ford Motor Company has shared that most of its US assembly plants will be reducing their annual summer shutdowns to one week.

As well, most other auto OEMs are considering deferring annual summer breaks to later in the year.

Sales recovery to hit headwinds?

The question going forward is whether recovery signs will continue into June and further out.

While recent trends suggest sales are showing steady gains and automotive manufacturing in North America is gradually coming back on stream, there is also the possibility of a resurgence of the virus bringing further economic headwinds.

However, Counterpoint continues to maintain its current outlook for the US auto PV and light trucks market at a base case estimate of almost 13.4m units in 2020, marking a 24% YoY contraction.

Exhibit 1: US Vehicle Sales,’000 units

Counterpoint: Coronavirus Pandemic Impact on US Automotive Industry

Author: Vinay Piparsania

 

Week 10: Changing consumer behaviors and how mobility companies can adapt

The pandemic is affecting most sectors of the economy, especially shared and smart mobility operators. Public-transport usage in major cities has declined anywhere from 70 – 90% of normal loads, and operators are now required to follow strict protocols like requiring face coverings, temperature scans and limiting the number of riders in trains and buses to ensure social distancing.

Similarly, ride-hailing mobility usage has plummeted dramatically, with several players suspending services during lockdowns. In the US, demand for Uber and Lyft fell by over 80% in April from pre-COVID levels.

Over the long term, the outbreak will have lasting impacts on shared mobility as the pandemic alters the economic, regulatory, and technology environment, as well as changing consumer behaviour.

Changes in consumer behavior and preferences

Mobility is an essential aspect of our lives, but how we get around in the future could be significantly different in the post-COVID world. Social distancing is the most significant driver of change in this new environment, with people rethinking their transport modes to avoid the risk of infection. Recent trends in China’s major cities are demonstrating that as bus and subway ridership drops, private cars, walking, and biking are gaining in popularity.

Personal vehicle use may be the winner in the short term, and app-based ride-hailing aggregators are seeing a dramatic decrease in consumers using their services as remote working becomes the norm.

Further demands are being made on share-car drivers and their companies to take responsibility for keeping vehicles clean and virus free. To adapt, mobility industry players are adjusting their tactics, with leading companies focusing on various strategies.

Lyft

Lyft, which announced cuts and furloughs affecting hundreds in May, stated that rides on its platform in the US reached only 25% of pre-COVID levels during the month, with consumers slowly coming back in cities where lockdown restrictions were eased. Lyft drivers are now required to self-certify within their app of wearing a facemask before they are allowed to pick up passengers.

Uber

While the global number for June trip requests are picking up as several countries ease restrictions, rides are still significantly below last year’s levels. In an attempt to improve profitability, Uber has remained focused on its core businesses of ride-hailing and food delivery, and also announced cuts to its workforce. Uber also introduced a new feature requiring drivers to take a selfie of themselves wearing a facemask before logging onto the company’s network. Uber has also been providing disinfectant sprays to drivers, encouraging them to sanitize their cars regularly.

Didi Chuxing

With cities in China now officially re-opened for business, Didi Chuxing, the country’s largest ride-hailing app, is seeing ride-sharing demand coming back to levels similar to last year.  Since May, Didi has been using AI technology to authenticate that its driver-partners are wearing face masks.

Diverse regulatory and policy responses across regions

The current crisis is helping some regions move more quickly towards sustainable mobility, while others are looking to defer or relax regulatory mandates to support depressed automotive industries.

In some markets, incentives such as cash for turning in old cars is driving sustainability through replacement and also encouraging adoption of electric vehicles (EV).  In other regions, like the US and China in particular, regulators have considered relaxing emission targets in support of automakers.

Chinese regulators are also relaxing, at least for now, policies limiting personal vehicle ownership in order to facilitate social distancing. Many governments are also showing interest in dedicating space for pedestrians and cyclists, while some cities like New York are looking to close some streets to vehicular traffic.

Technology development 

Over the short to medium term, the pandemic could delay the development of advanced technologies, such as autonomous driving, as automakers divert research budgets to fund immediate cash requirements. Similarly, investments in micro-mobility and shared-mobility start-ups are expected to fall and could drive market consolidation.

The impact of COVID-19 on EV development will differ across regions. In China, we expect post-COVID EV sales to rebound, with continued investment in development. In Europe, while ramp-up of EVs may be delayed with historically low oil prices, stringent environmental regulatory pressures could remain a counter-balance. In the US, we could see EV demand stagnate should federal emissions regulations be eased and oil prices remain subdued.

Over the long term, however, autonomous vehicles, micro-mobility solutions and other technologies that support physical distancing will benefit. We believe that as the initial crisis subsides, customer demand for these solutions could soar.

How can mobility companies cope?

Even before the pandemic, mobility and automotive start-ups were suffering from slowing growth in major economies. Battered by lockdowns and movement restrictions, ride-hailers around the world have had to resort to cutting jobs and slashing costs.

Looking ahead as the pandemic gradually comes under control, mobility companies will need to look at developing detailed plans to scale up operations, not only focusing on where, but how. A portfolio review aiming to rationalise services can help focus on profitable operations and decide on which technologies are to be prioritised, so to emerge from the crisis leaner and stronger.

Conclusion

Counterpoint believes recent consumer behaviour changes in the mobility space will be temporary, and shared-mobility solutions, including public transit, will rebound. Micro mobility and last-mile solutions, too, will eventually recover, as cleaning and disinfection protocols are practised, with status updated on ride-hailing apps.

Now more than ever, it has become imperative for automakers and mobility operators to review their long-term strategy.

Exhibit 1: COVID-19 Impact to Global Automotive and Shared Mobility IndustryCounterpoint: COVID19 long and short term impact on automotive industry

Author: Vinay Piparsania

 

Week 9: Poised for a rebound?  May’s mixed signals

As the effects of the pandemic are being brought under control, we are seeing gradual automotive sector recovery, though at varied rates.

With most parts of the world easing lockdowns in May, auto sales have begun to show some signs of improving. Prospects for China, having reopened earlier than most, and the US are looking more positive than for Europe.

In the short term, the global automotive industry appears to be poised for a rebound as manufacturers replenish dealer inventories and meet pent-up demand, especially with many consumers expected to take efforts to avoid public transport and ride-sharing.

Longer-term, however, Counterpoint sees a more gradual recovery, with dampened vehicle sales from Q1 carrying over into Q2. Supply-side issues will also cause problems, with stuttering production schedules from broken supply chains, financially stressed suppliers, and delayed new model launches limiting supply.

With some leading indicators now visible, we have decided to maintain our current 2020 PV forecasts. However, key risk factors of a virus resurgence remain high for some locations, with the possibility of markets going into lockdown again.

Below is our latest outlook, incorporating May sales updates from key global markets.

China

The first country to be impacted by the virus outbreak, China has been quick to recover from the pandemic, and PV sales are almost back to pre-coronavirus levels of growth. Largely on account of the automotive industry’s effective restart in March, sales and production activity approached normal levels in April, with PV sales up 4.4% YoY to 2.1m units. May saw further improvement, with sales rising 12% YoY to 2.1m vehicles.

Pent-up demand drove steady deliveries in April. This was further supported by government subsidies and intensive promotions and discounts offered by dealers. The momentum continued into May, raising our overall expectations for Q2.

However, domestic and global headwinds remain, and the market still faces a high level of economic uncertainty. Consumer confidence is fragile, with fear of unemployment and income loss dampening high ticket, discretionary purchases.

As a sustained, comprehensive recovery is still to be established, prospects for H2 remain cloudy and we maintain our current forecasts.

US

May sales are estimated at around 1.1m PVs, down 30% YoY, but an improvement to April and March’s respective declines of 45% and 38%. Easing of restrictions across most of the country helped May pass the one million mark.

Throughout the lockdowns, however, the market did demonstrate some resilience, with significant commercial activity continuing as vehicle sales were categorised an ‘essential service’ by many states.

While American retail consumers are coming out again to look at cars and trucks, facilitated by digital retail tools and appealing discount offers, fleet and commercial category buyers, particularly those in rental cars, are not. This is worrying as new vehicle sales to rental car companies accounted for about 10% of the overall market, or 1.7m vehicles, last year. Bankruptcy filings of Hertz and its parent company Advantage Rent A Car in the last week of May will likely weigh down US auto sales.

We maintain our current outlook for the US, with a 24% YoY contraction expected in 2020.

Europe and the UK

European car sales picked up slightly in May after a disastrous April. In Spain, May sales dropped over 72% to 34,000 units, and to almost half previous year totals in France, Italy and Germany, which saw sales of 96,000, 100,000, and 168,000 units respectively, as partial lockdowns remained. Overall, YoY sales for Western Europe fell over 57% in May, to 556,000 units.

For the UK, new car registrations were down 89% YoY in May, with 20,200 cars registered last month. Despite the drop, the figure marks an almost five times increase over new car registrations in April, when only 4,300 cars were sold. The Tesla Model 3 topped the UK new car sales chart for the second month running, with 850 units delivered, making up nearly 5% of all registrations.

With around half a million new cars registered since the beginning of the year, the overall UK market has halved in the first five months of 2020, compared to almost one million units registered during the same period last year. While showrooms in England have reopened after two months, dealerships in Scotland, Wales, and Northern Ireland are still shut.

Reopening’s have helped sales in Germany, with May sales falling by 50% compared to over 60% in April.

As we look ahead, Counterpoint is paying particular attention to any government announcements around fiscal policy or economic relief programs such as that planned for France and Germany, which are looking to lower VAT. While details will vary by country, recent announcements imply modest levels of incentives can be expected.

Even with some signs of improvement in May, the industry remains in crisis, with various stages of lockdowns expected for some time. Our outlook for Europe remains unchanged – a 26% contraction expected in 2020, with the possibility of a gradual recovery in H2 2020 as consumer sentiment improves with the easing of lockdowns.

India

After zero sales in April, preliminary shipment data for May suggests only 37,000 units were sent to dealerships, an 85% decline YoY, as the country started to open up gradually during the month.

With auto OEMs and dealerships estimated to be holding nearly 300,000 units of inventory – about two month’s stock based on current projected retailing rates – wholesale shipments over the next few months are expected to be difficult.

Overall consumer sentiment in the country remains weak, mostly because of the economic fallout of a complete nationwide lockdown lasting 50 days, depressing GDP forecasts, and increased caution around car loans. For any significant recovery to happen this year, it is critical that automakers and dealers have operations and consumer offers fully in place as the festive sales season commences during the last quarter of the year.

Our India sales forecast remains unchanged. Our base case outlook sees YoY passenger vehicles declining by 25% to around 2.1m units.

Japan

While having been a relative bright spot so far, the Japanese market worsened in May. Sales dropped, nearly 55% YoY to 218,285 vehicles, compared with a 29% YoY decline in April.

Consumer sentiment remained depressed, with expectations of an economic downturn curbing big ticket purchases. Also, the government’s declaration of a state of emergency and stay-at-home advisory, which ran into the Golden Week holiday in late April to early May, severely impacted sales, which normally spike during the annual holiday.

While overall economic activity shows some positive signs of recovery since lifting of restrictions in May, our outlook remains unchanged.

Revised Global Automotive Outlook

While varied signs of recovery began to show in May, Counterpoint Research remains cautious and we leave our earlier global automotive sales outlook unchanged at around 72m units for 2020, a 20.1% decline from 2019.

Exhibit 1: Global Automotive Sales (M units)

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 8: India’s Auto Industry to decline by at least 25% in all categories in 2020

India’s automobile industry, the fourth largest globally by volume, is headed for another year of significant declines as extended lockdowns impact production and consumer demand. Sales volumes of passenger and commercial vehicles are projected to drop to levels not seen in over a decade.

The storm continues

At the beginning of the year, the auto sector was already suffering in the midst of a challenging economy.  Compounding this, more stringent environmental and safety regulations, the growing popularity of shared mobility platforms and cautious lending by banks and non-banking financial companies (NBFCs) negatively impacted vehicle sales. COVID-19 is now making the situation far worse.

Based on data reported by the Society of Indian Automobile Manufacturers (SIAM), March passenger vehicle sales declined 51% YoY to 143,014 units. Sales of two-wheelers fell 40% to 866,849 units, and commercial vehicles declined 88% to 13,027 units. With a nationwide lockdown in effect from the last week of March, the industry saw zero production and sales of new vehicles in April.

Factories and dealerships struggle to resume operations

While automakers began partial operations in May, it has been an uphill struggle. Openings were allowed only after receiving due approvals from respective state authorities, and conditional to following safety protocols such as body temperature scanning, social distancing and ensuring high standards of sanitization.

Shutting down operations was far easier than reopening factories as companies need to manage complex synchronization issues. The resumption of operations requires OEMs to coordinate with hundreds of local and global suppliers, logistics partners and thousands of employees. The biggest challenges come from not having enough workers willing to come back and sufficient and continuous parts supply. It is likely plants across the country will function with a skeleton staff at least until July.

Slow dealership re-openings are another problem, with almost all vehicle sales delivered through them – online sales are a rarity and still under development. As of the last week of May, only 3,500 dealerships were operational around the country, representing 20% of the total network. And amongst these, half were operating only their service departments and not showrooms.

The sharp contraction in sales will also lead to a decline in average manufacturing capacity utilization. For the PV segment, effective annual capacity utilization is projected to drop down to as low as 45%, from 60% a year ago. Two-wheelers and commercial vehicles will drop to below 50% and 35%, respectively, from 65% and 51% a year ago.

Demand outlook for 2020

The lack of government policy intervention for the automotive sector in this year’s national budget and also recent fiscal stimulus packages combined with a lack of visibility around when social and economic demand conditions will get back to normal has resulted in Counterpoint revising our 2020 forecasts. Our base case outlook sees YoY passenger vehicles, two-wheelers, and commercial vehicles declining by 25%, 21% and 28%, respectively. CV sales in particular, have been languishing under the impact of a new axle load norms, and is unlikely to show much recovery this year with freight demand projected to remain low.

Recovery timing

Demand recovery can only be expected around the festive season in the last quarter of the year. With growing consumer preference for cheaper, personal transport, two-wheelers – motorcycles in particular, with their higher rural share – will likely be the first category to see a rebound. Should the government develop scrappage schemes and lower interest rates for vehicle loans, along with reduction in sales and road taxes, as seen across SE Asia, these interventions could accelerate recovery.

Despite the above challenges, we remain positive longer term in view of India’s comparatively low vehicle penetration – 110 two-wheelers and 32 cars per 1,000 – Australia has 740, Japan has 591 and China has 164 vehicles per 1,000 individuals. We expect recovery post-2022, helped by improvement in non-banking financial institutions and the overall economy. Combined with a young population, rapid improvements in road infrastructure, growth in rural demand and possible introduction of entry-level passenger cars, this could significantly boost consumer demand.

Exhibit 1: Key Factors Affecting the Market

Counterpoint: COVID19 Key Factors Impacting Indian Automotive Industry

 

Exhibit 2: India Vehicle Shipments1 (in Million Units)

Counterpoint: COVID19 Growth Rate of Indian Automotive Industry; Cars, Two-Wheelers and Commercial Vehicles

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 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

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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