COVID-19’s Impact on the Global Automotive Industry
By Jeremy Rice
As COVID-19 continues to wreak havoc on financial markets across the globe, the automotive industry is bracing for substantial and long-lasting impacts. From supply chain interruptions to plant shutdowns, to a substantial slowdown of retail sales, the entire industry is under threat.
The regional impacts of the outbreak are highly variable, but as it spreads, the current status in the harder hit areas provide a glimpse of what may be ahead. China saw a 79% drop in the automotive market in February 2020. As a result, Chinese auto manufacturers have petitioned the government to stimulate the market through tax breaks, subsidies, and temporary reductions in emissions requirements.
The original epicenter of the global outbreak is Hubei province, which is one of the core regions of automotive production within China. Utilization within automotive plants in Hubei remains far below capacity, with many plants fully shut down. Factory restarts will occur as COVID-19 cases in Hubei continue to drop, helping the overall industry get back on track, but the process is likely to take months.
In Europe, many of the largest automotive groups, including FCA, Volkswagen, and PSA, have shuttered most plants across the continent, effectively halting the entire supply chain for the time being. Ford has also announced a halt of production activity throughout Europe. Retail activity is currently at a standstill, as many European countries have moved into full lockdown.
Over the past week, original equipment manufacturers’ (OEM) production in the U.S. has ground to a halt. It started with negotiations between the United Auto Workers and the “Big 3” OEMs (Ford, FCA, and GM), which agreed to temporarily halt production. Since then, OEMs across the U.S. have announced upcoming plant shutdowns, with the latest being the BMW plant in Spartanburg, SC, which is scheduled to close on April 3, 2020.
On the retail side, OEMs are focusing on driving sales through financing incentives and other consumer-friendly offerings. With nine states under shelter in place requirements, and certainly more to come, retail activity is also experiencing significant slowdowns. A prolonged slowdown of retail sales will have far-reaching impacts, as OEMs may struggle to meet demand due to capacity constraints once the market picks up.
As OEM production shuts down, the automotive supply chain is also closing. Suppliers do not have the ability to stockpile inventory, because they generally produce and deliver in a just-in-time format. And automotive suppliers operate on thin margins, which require high volume and efficiency to maintain operations. As cash flows dry up, suppliers will face difficult choices regarding their labor force and the future viability of their businesses.
In response to these impacts, forecasts for U.S. light vehicle sales in 2020 have been reduced to 14.5 million units, compared to 17 million units in 2019, with further reductions possible. There remains significant uncertainty in the market as the length of the shutdown remains unknown.
The COVID-19 situation remains fluid, and while the automotive industry is not known for it’s nimbleness, it will need to react quickly to changing rules, regulations, and consumer demand. The long-term impacts are not yet known, but it is certain that they will be significant and widespread throughout the supply chain.