Can European Auto Makers Move From Limbo To Normality, Bypassing Existential Threats?

The automotive industry is suspended in a kind of coronavirus phoney war. Factories, silent for weeks, are now gearing up for production again. People in Europe and North America are rubbing their eyes and emerging from lockdown. The big question is, when output starts up again in earnest will they willingly open their wallets and buy? Will things return to normal quickly?

Unlike the financial crash of 2008, when a banking crisis led to scary and often surprising bankruptcies and genuine uncertainty about the economic future, this time the slowdown has been more of a stoppage, but there’s no mystery about why. It had nothing to do with the underlying condition of the global economy. It was self-induced to fight off the coronavirus.

At first it was assumed by many the recovery would be quick and strong; it would be “V” shaped as the economic levers were simply switched back on. But it is clear now there may be significant long-term damage to demand because many marginal small businesses, the backbone of many western economies, might not survive even a relatively short lockdown. And those who held on to their jobs might be worried about their future and hold off buying big ticket cars and SUVs. After all, if your vehicle is 3 or 4 years old, it would be easy to delay replacing it for a year or two.

And if some small businesses were jeopardized by the sudden dive in demand, a few massive but marginal automakers might not be immune either, as cash flow dries up and reserves are quickly eaten away. Debt-rating agencies have pointed the finger of vulnerability at British-based and Tata Motors of India owned Jaguar Land Rover, Mercedes’ parent Daimler and French mass carmaker Renault.

Some core questions have been generated about the industry’s future with conflicting results. Will the big move to home-working mean long-term changes in commuting habits and a cut in auto demand? Will fear of infection on mass transit mean a big boost in demand for cars because of the safety from infection offered by your own air-conditioned vehicle? Will the acclaimed improvement in air quality as commuting routes were deserted by internal combustion engine (ICE) powered cars, lead to a big increase in demand for electric cars? Will the big slump in oil prices make ICE cars more affordable in a time of economic squeeze, to the detriment of high priced electric cars? Will we purchase cars sitting at home with a click of a mouse, like Tesla
TSLA
buyers, or still insist this decision is not possible without the traditional tire kicking and test drive.

For the manufacturers there are unanswered questions hanging in the air. Will governments decide on “cash for clunkers” subsidies to stimulate sales? If they do come up with money in countries like Germany, will governments insist on linking money to environmental conditions, which could help electric and small ICE cars at the expense of high-priced models which actually make money?

Analysts and consultants have been scrambling to predict just how bad the short-term impact on sales will be.

S&P Global Ratings is the latest to take a stab at forecasting the outcome for car and SUV sales, and its latest researches point to a scaling back of some recent doom-laden predictions. S&P now says European sales in 2020 will be at the lower end of its 15 to 20% fall prediction. U.S. sales though will be worse than previously predicted, down to 12.7 million, off 25%, compared with 2019, after it earlier said down 15 to 20%.

“This brings our global light vehicles sales forecast down to 75 million vehicle in 2020, a 17% decline from last year. For 2021 we expect a global rebound of 10%. U.S. leading the recovery with a 19% growth followed by Europe at 15%,” S&P said in a report.

Earlier this month Moody’s Investors Service had a much bleaker outlook for Western Europe, predicting sales will fall 30% this year to 11.4 million, after it earlier said 21% down was more likely. Moody’s said sales will accelerate 7.5% in 2021. Western Europe includes all the big markets like Germany, France, Britain, Italy and Spain, which dwarf the markets of eastern Europe. Moody’s said U.S. auto sales will fall 25% in 2020, compared with its previous guess of down 15%. U.S. sales will rebound nicely in 2021 by 16.2%. China sales will fall 10% this year and grow 2.5% in 2021.

Car and SUV sales in Western Europe plummeted 80% in April.  

Only a couple of months ago forecasters were hoping that auto sales in Europe might slip only about 5% in 2020, but as the virus impact accelerated shutdowns, forecasters have been slashing numbers.

GlobalData expects world sales to fall 18.9% in 2020 to 72.8 million, and expects this will cause big upheavals.

“That is a bigger annual percentage drop to the global market than we saw during the last great recession. A decline of this magnitude will create structural change in the industry all along the automotive value chain – from parts suppliers to vehicle manufacturers and retailers,” GlobalData analyst David Leggett said.

The shutdown has cost vehicle makers $139 billion in lost revenue in Europe and North America up to the end of April. There are signs of recovery appearing in China and other markets will join in. Damage limitation is now the watchword.

“We are seeing a recovery to the vehicle market underway in China and our projections are for a gradual recovery to other markets and for global sales from the third quarter of this year,” Leggett said.

“There is, however, no avoiding the strongly adverse impact of lost sales on companies’ financial performances and cash flow during the worst of this crisis and its aftermath. The priority for many is simply to have enough cash to weather the worst of the storm and get through to the recovery phase, but sales will be below pre-crisis levels for some time to come,” Leggett said.