Auto Industry - Supply Chain
The auto industry supply chain has faced some major disruptions as a result of the coronavirus. Many factories all over the world are experiencing staggered shutdowns, resulting in a dynamic and ever-moving picture of the global industry. Global auto sales have declined as consumers are either too scared to enter dealerships for fear of contracting the virus, or outright forbidden due to stay-at-home mandates. The used car industry is also heavily affected by COVID-19 and experts predict that the segment will be ruled by “unprecedented” price drops. Complete details about all the findings are provided below.
#1: INSIGHTS ON THE COVID-19 IMPACT ON THE AUTO INDUSTRY SUPPLY CHAIN
- The disruptive effects of the coronavirus on the automotive supply chain are expected to primarily impact new-car demand, supply and, ultimately, registrations. In February 2020, Moody’s, a credit rating agency, projected that global vehicle sales would experience reduced demand and that the automotive supply chain would be challenged due to coronavirus.
- These challenges to the supply chain are largely due to factory shutdowns, travel suspensions and a heavy reliance on imports for sourcing parts. The Wall Street Journal reports that shortages of auto parts (from electronics to brake pads) may begin to impact North American vehicle factories due to the outbreak.
- Because the automotive industry is described as operating on a ‘just-in-time’ delivery system, manufacturers needing to source parts from a country with limited travel usually have to cancel the supply of parts and find other sources as soon as possible. Some experts believe that even without the issues of having to produce with large amounts of the workforce ill and at-home, transportation restrictions can often sever the movement of automotive parts causing major disruptions in the “just-in-time modus operandi.”
- While the supply chain has been negatively impacted by the COVID-19 outbreak, experts are “much less concerned about supply chain disruptions” and more concerned about what is happening to demand. For instance, in February, Chinese consumers bought 1.6 million fewer cars than they did the year prior. For March 2020, the country is expected to “run another 1 million vehicles behind last year’s pace.”
- Some of the countries with supply chain issues include Mexico (where many parts are sourced from China), Japan (delivery delays) and Korea (sourcing from China and export issues). As of March 13, 2020, German automakers reported stable supply chains.
- Temporary factory shutdowns have already affected Italy’s largest auto manufacturer, FCA, which closed three factories in Italy during the initial outbreak (FCA produces 600,000 vehicles annually for domestic and export markets). Those shutdowns, if lasting a full month, could have potentially affected the manufacture of roughly 50,000 vehicles (600k/12) for FCA alone. Near mid-March 2020, Lamborghini closed its Italian factory for more than a week, and Ferrari initially ran at a reduced capacity but then needed to close completely.
- Incredibly, in Wuhan, “Bosch has two plants making steering systems and thermotechnologies, with around 800 employees. There have been no reports of infections. The CEO said the supplier was concerned but had not yet seen disruption to its business or supply chain.”
- Additional automakers all over the world have also projected shutdowns and reopening; with some opting to use factory equipment and protocols to help in the fight against COVID-19 by starting ventilator production. For instance, Ford, Lamborghini, Aston-Martin, and Rolls-Royce will use their facilities for health crisis support (i.e., helping to produce vital personal protective equipment).
- For many automakers, the scheduled reopening of their factories has not yet been set. Volkswagen in Chattanooga, Tennessee initially closed on March 21, 2020, to “conduct a deep clean of the facility and sanitize the entire factory” but as of April 9, there is still no set date to reopen. The company also suspended production at numerous other production sites in Europe (e.g., Slovakia, Portugal, and Spain).
- Additional automaker factories with shutdowns include General Motors, Fiat Chrysler Automobiles, Kia, Mazda, stoning Martin, Volvo, Rivian, Bugatti, Tesla, Bentley, Jaguar-Land Rover, Toyota, Subaru, Honda, Hyundai, Nissan, Porsche, Rolls-Royce, PSA Group (maker of DS, Opel, Vauxhall, Citroen, and Peugeot), Renault, Ferrari, and Ducati. The shutdowns are said to protect production and inventory since “no one will want to be sitting on excess inventory if this situation drags on.”
Global New Car Sale Declines
- While the team previously shared that global vehicle sales were expected to decline by 2.5% in 2020, what is especially hurtful to the auto industry is that a 0.9% decline was previously projected before the outbreak. Unfortunately, the 2.5% figure is a best-case-scenario for the virus should it have been contained by the end of the first quarter (March 31st). Still, because these hits are occurring early in the year, and the remainder of 2020 can potentially see some recovery, this is not a year “expected to go down in history as catastrophic.”
- China, as the country to first experience the health and economic ravishes of COVID-19, saw new vehicle registrations plummet to approximately 92% in February 2020.
- Europe, with its countries being at a different phase of the outbreak, have yet to see any “dramatic downturns in new-car registrations” (for February); light-vehicle sales in Western Europe are expected to have the largest sales decline in 2020; the UK is expected to see a decline of 3.0%.
- In the US, new car sales are expected to decline by 16 million sales for the year. Even if the stay-at-home orders ease up and consumers go back to shopping for new cars by the end of April, there would still be “roughly half a million lost sales.”
- “South Korea's combined auto production fell 26.4% on-year to reach 189,235 units in February, while domestic sales decreased 18.8% to 97,897 units as the consumers' sentiment was hurt by the COVID-19 outbreak.”
- Although all car manufacturers are expected to be hit pretty hard by the economic consequences of COVID-19, electric vehicle (EV) makers, in particular, are expected to suffer more than traditional manufacturers. This is because the “EV market is particularly vulnerable in the current crisis” since it is a relatively young segment compared to more standard vehicles. The industry is also vulnerable because it has a heavy “dependence on global sourcing for its core technology.”
- While the segment has made some vital inroads recently in the minds of individual and enterprise consumers, falling oil prices and the unknown trajectory of the coronavirus outbreak “could keep potential EV buyers on the side of internal combustion vehicles for a while.”
Auto Shows & Dealerships
- Auto sales that would have been generated as a result of auto shows have not only been negated due to the cancellation of major auto shows in Geneva and New York but the financial hit is especially hard since many companies “spent millions in preparations and elaborate stands with their latest vehicles on display.”
- Even before bans on large gatherings in the US, dealerships were seeing less foot traffic because potential buyers were opting to avoid social contact.
- Morgan Stanley predicts that these slowdowns will cause an annual sales drop of 1.6 million units in the US (from 17.1 million in 2019 to 15.5 million in 2020).
- Used car dealerships are also having issues because of court closures and challenges regarding pricing used cars due to difficulty estimating supply chain-based financial declines.
- Additionally, automaker brand marketing is also taking a hit due to the stay-at-home orders. For instance, since sporting and other large-scale events were canceled, the millions of dollars spent on marketing and advertising have gone a bit wasted.
#2: INSIGHTS ON CONSUMER BEHAVIOR CHANGE
- An article from The Wall Street Journal reported that as American consumers stay home, new car sales are “tanking.” This change was evident prior to more mandated protocols being in place to close non-emergency US businesses in order to abide by social distancing strategies. The virus outbreak initially slowed traffic to US dealerships which resulted in some car companies choosing to suspend manufacturing at North American factories.
- According to Autoweek, while the virus has impacted productivity at factories—from workers having the disease to companies needing to make safety/health accommodations like extra time cleaning and greater spacing between workers—the negative results on the economy and stay-at-home orders will further impact demand. From the report: “For now, the effect on auto manufacturing in Europe has been minimal and suppliers have been able to ship parts from Italy to other countries, but it remains to be seen how much demand will shrink in the coming weeks and months.”
- Consumer demand for new cars is shrinking also due to companies scaling back capital spending used for buying new corporate vehicles.
- The economic consequences of the outbreak have resulted in auto trading portals not seeing very much activity. In Italy, sales of used cars sold via portals dropped by 65% in the week of March 16-23, 2020; the UK only saw a 32% decrease but this country took a little longer to implement stay-at-home orders. Other European countries like France, Germany, and Spain saw declines between 45% and 69%; note that these numbers are expected to increase “substantially over the coming weeks as the short-term demand shock will become even more visible and dealers remain closed with too little activity on the e-commerce front.”
- Changes to the supply chain brought on by the virus have caused a trend of price drops for used cars especially in Italy where lock-down orders have been in place longer. Conversely, in the UK, used car pricing saw a slight increase but this is credited to “reduced supply of traditional internal combustion engine vehicles and improved demand for alternatively fueled vehicles.”
- In February 2020, within the US, there was a 30% jump in used-vehicle sales. However, this kind of jump is typical of the tax refund season in the country and is not a sure sign that the used car industry is fairing well during the outbreak.
- Carvana is a major platform often mentioned as a dealership competitor that helps to drive used car prices down.
Predictions About Consumer Interests/Behavior
- It is unknown whether consumers will become more “tightfisted” as a result of the coronavirus outbreak and its aftereffects. If so, more expensive cars, like EVs, could see a decline.
- However, closely tied to EVs are autonomous vehicles, and interest in this segment has increased in China during the outbreak. While autonomous vehicles may not solve individual consumers’ infection issues, transit industry operators, maintenance workers, and station workers might be key groups affected by a potential boom in autonomous vehicles considering these workers’ health risks and concerns that were illuminated during this outbreak.
- Cox Automotive estimates that “more than 50% of consumers are less likely to visit a dealership at this time.”
- It should be noted that consumers as workers are expressing a lot of fear and concern for their personal risks while working. This has resulted in several industries that are considered essential and, therefore, remain operational during this outbreak, reporting strong worker protests regarding unhealthy working conditions and fears about contracting the virus while at work. The auto industry has also experienced walkouts; in Canada, for instance, “employees [at the FCA minivan plant in Windsor] walked off the job after one worker went into self-quarantine.” So, while not explicitly stated in the research, worker virus safety at automotive plants might be an opportunity since it is a crucial pain point.
#3: COVID-19 AND THE AUTO TRADING SEGMENT
While the research team was able to identify that used cars using petrol and those priced with “unprecedented deals” would likely be the most popular type of used car to sell during and after the coronavirus outbreak, the top brands in this arena have not yet been discussed at length by experts. The research team made this determination after a careful crawl through projected sales reports, industry reports, media reports, professional association publications, and government databases. Most of the details are likely not available because the industry seems especially vocal and focused on new vehicle sale declines and the dynamic interplay between the coronavirus, social distancing mandates, employee protests, and severe economic fluctuations. There is also a likelihood that there is just not enough information yet based on the relative recency of whole-country lock-downs which started in February and after the first week of March in the US. These numbers may not be processed yet in such a way as to assess top brands instead of the overall impact on the segment. As a result, the research team focused on providing helpful details relevant to the used car industry overall.
- While private car buyers are not expected to be impacted too much by the pandemic, used car dealers are expected to see residual values decline and to have a higher inventory in petrol cars (as opposed to diesel) due to an oversupply of used cars.
- IBISWorld reports that for the used car parts wholesaling industry the global COVID-19 pandemic has slowed revenues, consumer spending and demand for used cars, and the full impact is unknown because if unemployment is chronic it could “cause an increase in demand for lower priced items or a decrease in overall spending, leaving a dual effect on industry demand.”
- There is a focus on overall car sales which are declining across the globe. This article provides a brand-by-brand breakdown of those declines.
- Used car prices are expected to plummet because of the COVID-19 outbreak and its economic consequences. Prices might be lower than those seen in the 2008 recession. Given this, used car dealers may need to offer “unprecedented deals.”
- According to JPMorgan, used car prices are expected to decrease by more than 15%.
- Although a “demand shock” is expected to be substantially greater than what was experienced in the 2008 recession, the duration of the effects is expected to be shorter.
- Rental car fleets are expected to provide a flood of used vehicles into the market because their fleets are sitting idle during the outbreak’s stay-at-home orders.
- An additional resource, which offers a daily briefing on automotive coronavirus topics compiles articles related to the industry, all in one location. Because the virus has had a dynamic impact on the automotive industry and things have been illuminated so sporadically from one day/week to the other, this resource might be a valuable and relevant one to occasionally review for daily updates regarding the segment.
#4: BUSINESS OPPORTUNITIES
- Consumer Reports notes that car dealers are in what is being called a “forced evolution” due to lower foot traffic. These dealerships are reporting operating in new ways. Once Honda of Hollywood, a Honda dealer in Los Angeles, observed the slowdown, the company implemented advertising noting that it would conduct online transactions and provide free home deliveries. Dealership visits are also by appointment only.
- Traditionally, online sales only accounted for 10-15% of the US car market. However, changes due to the virus have some dealers revamping their online platforms offering more online capabilities and vehicle options.
- “Jason Courter, chairperson of the American International Automobile Dealers Association and chief operating officer at Honda Auto Center in the Seattle area” believes that this focus on online sales will encourage more development of car buying platforms optimized for mobile phones and tablets.
- Some of these changes have been so valued by consumers that the “universal feedback [from customers has been] ‘I’ll never set foot in a dealership again’” due to the timely paperwork signage (5 minutes) and probably other factors (like avoiding facing overly aggressive salespersons).
- Prior to the coronavirus outbreak, ~20% of car dealerships offered online transactions. To help dealers “build resilience, and reimagine the future” Cox Automotive launched a new business continuity resource hub designed to facilitate digital education and resources that have become necessary in the wake of the coronavirus pandemic. Topics include digital retailing, connecting with remote shoppers, and deal-making in the digital world. The company reports a 189% increase in its brands’ that have signed up for the service from February 2020 to March.
- To mitigate some of the financial damage done by reduced foot traffic into dealerships, some companies (e.g., Hyundai and Ford) are offering payment relief (for buyers who are laid off) and/or payment deferral programs for new and used cars.
- Other providers are utilizing more virtual reality options. For instance, in Tacoma, Washington an independent dealership, All American Motors, allows its customers to walk around a car virtually through video chat.
- Still, other companies are expanding partnerships. For instance, VinSolutions (provider of Connect CRM) and Flick Fusion (video hosting platform) have partnered to “deliver integrated video communications to auto dealership customers.”
Advanced Disinfection Services
- Dealerships have also been including a list of precautions taken to ensure that vehicles are not contaminated by the virus.
- To help its brands with this sort of innovation, Cox Automotive began to more aggressively promote its RideKleen service which reports that “it can now treat vehicles with an EPA-approved, hospital-grade disinfectant called DetraPel, which is designed to kill 99.9% of bacteria and viruses, including coronavirus.”