Impact of Coronavirus on the Automotive Sector

April 24, 2020 | Miscellaneous

The novel strain of coronavirus, also known as COVID-19, began spreading from the Chinese city of Wuhan around mid-December 2019. China is the biggest car market in the world. Coincidentally, Wuhan, the city at the center of the outbreak, is known as China’s ‘motor city’, as it’s home to many major auto manufacturing plants. The automotive industry is one of the most impacted sectors from the pandemic. Ratings agency Moody’s predicted global vehicle sales will drop by 2.5% in 2020. The hit to the auto industry, which employs eight million people worldwide, comes as output from the world’s factories is already sagging.

The main auto markets impacted from the coronavirus are Asia, the EU, and the North America, which combined have an 86.29% share of the global auto market. The top auto markets under these areas include countries such as Italy, France and Germany from Europe, India and China from Asia and the U.S. from North America.

Impacts on Asia, Europe, and the US

Key Asian markets include the Chinese and the Indian automotive market. Auto sales in Jan. 2020 were down 52% compared to last year as China moved to shut down its manufacturing sector. In February 2020, production fell by more than 80% while sales dropped by 79% compared to last year. Major companies like General Motors, Honda, Tesla shut their manufacturing units in China. Meanwhile, the Indian auto market, sized at $74 billion in 2018, sources around 27% of its auto components from China.

The auto sector provides direct and indirect employment to around 14 million people, accounting for 6.1% of all EU jobs. Sales in Germany, Europe’s auto manufacturing capital, were down by 10.8% in February 2020. PSA Group, Fiat Chrysler and Renault announced the closure of 35 manufacturing facilities across Europe, while Toyota halted operations at two plants in France and Portugal. BMW announced plans to shut plants in South Africa and Europe. European auto manufacturers are at a relatively higher risk because of the higher levels of dependency on sales from the Chinese market. For instance, Daimler and BMW depend on China for around 30% of their sales, while Volkswagen depends on China for 40% of its sales. Meanwhile, America’s largest auto plants have been impacted by the coronavirus, including Michigan, which accounts for 17% of total automotive output. Production outages in Michigan and Texas are affecting General Motors, while Tesla has recently started to demand the reopening of their suspended main factory in California.

Snowball Effect

China, responsible for almost 40% of automotive parts globally, has seen shortages on account of the coronavirus impacting production. This shortage of auto supplies from China will affect production around the world as the global automotive industry imports more than $34 billion in motor parts from China annually. Major carmakers including Fiat group, General Motors, Honda, Maruti Suzuki, BMW, Daimler, Ford, and Toyota have halted production at plants while only a handful are operating but at a reduced capacity in facilities worldwide due to the restrictions imposed by governments all around the globe. Auxiliary car markets, like the tire industry and the after-sales market, have been hit hard as they are heavily dependent on the auto market. Major tire producers like Michelin, Goodyear, Pirelli, Bridgestone, CEAT and Cooper have halted production because of the decline in demand and to comply with health measures to stop the spread of the deadly virus. The original equipment market as well as the replacement tire market have fallen too as a consequence.

Remedy

At the EU level, the European Central Bank, the European Investment Bank and the European Commission have taken various measures to support affected workers and companies. The U.S. government announced a $1 trillion government stimulus and rescue package to bring relief to industries impacted by coronavirus. Major automotive manufacturers had not sought assistance from that package when it was announced and were hoping to get back to operation by early May. With the pandemic’s intensity increasing in the U.S., however, carmakers, particularly Tesla, are now starting to demand the reopening of the economy and the restarting of manufacturing.

Traditional automotive brands turned to online shopping for cars using tools such as virtual reality and live broadcasts to stimulate sales. Cities like Xiangtan and Foshan began giving monetary incentives to people who buy cars. In the U.S., major auto dealers have started providing lucrative offers and promotions to attract customers like delayed EMIs and low-interest loans.

The lockdown will accelerate the recession that was already on its way to the global market. But whether demand collapses or consolidates will depend on how national governments manage the recovery. If the current situation does not improve, then the auto industry will be headed to its biggest recession since 2008. Major Chinese auto-parts players are dependent on international auto manufacturers for almost 30%-50% of their sales in order to create positive operating cash flow. The auto sales market falls under the medium risk segment while the auto parts market falls under high-risk impact from the coronavirus pandemic. If the coronavirus outbreak is not controlled by the end of Q2 2020, it can lead to business consolidation with smaller automakers merging with the big players in order to survive.

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