The global auto market is headed for a 15–20% slump in 2020, with sales in Western Europe among the worst hit, with a likely 21% fall in new light-vehicle demand, though the region’s leading car makers have generally proved more resilient than expected.
Scope Ratings GmbH, the leading European credit rating agency, says the severe impact that COVID-19 has had on the sector — from disrupting supply chains, forcing the close of factories and undermining consumer demand — still needs to be put in the context of the cyclical downturn confronting auto makers and their suppliers before the pandemic struck.
The likely decline in global light-vehicle demand in 2020 to around 70–75 mio units — including a 12% and 15% in the Chinese and US markets respectively, the world’s biggest — follows the decline to 90 mio units in 2019 from the cyclical peak of around 95 mio units in 2018–2019. Volumes this year are likely to be around 2011’s level of 75 mio units.
“COVID-19 has created a very difficult set of circumstances for the OEMs (original equipment manufacturers) and their suppliers, though the market had already turned around quite sharply from its recent cyclical highs,” says Scope analyst Werner Stäblein. “That said, and in as much as we can draw conclusions from three month’s performance, the second-quarter showing by the European industry has proved less disastrous than perhaps might have been expected given the severe economic impact of the pandemic. While revenues were under intense pressure, OEMs were able to contain operating losses.”
The car makers benefited from government-backed short-time working programs in Europe to save on labor costs. They were also quick to pare back capital spending and tap bond markets to guarantee liquidity, or, in the case of France’s Renault SA, seek government-backed credit lines.
“Another important factor was the economies forced on management through factory closures for health reasons,” says Stäblein.
This represents a difference from the experience of the global financial crisis when management kept production lines going in the hopes of a short, sharp economic recession and to meet inflated demand as governments introduced purchasing incentives for customers.
The slump in demand will nonetheless weigh down heavily on the fundamentals of the car-making business, ensuring sustained pressure on management to reduce costs considering the extended time it will take for sales to return to 2019 levels in the current economic context.
“Daimler retains a strong financial risk profile and while, on business risk, we do not see any changes to the company’s market position and/or diversification, we do see weaker profitability in the quarters ahead,” says Stäblein.
Scope forecast a gradual but uneven economic recovery in Europe and the rest of the world assuming no significant second wave of COVID-19 infections.
“We expect a partial H2 rebound in sales in Europe as consumers take advantage of incentives — such as temporary reductions in VAT in Germany — to buy new cars, though past experience suggests that changes in taxation and subsidies tend to bring forward rather than create extra demand,” says Stäblein.
Smaller companies in the automotive supply chain may prove more vulnerable to the industry slowdown as government support measures end later this year and early in 2021, he notes. According to credit insurer Euler Hermes, there were 13 Q2 insolvencies in the automotive supplier, retailer and car-rental subsectors in Western Europe and North America.