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2020/04/09 Strategy Analytics- Coronavirus Disruption to Automotive

 by Kevin Mak | Apr 07, 2020
Originally published on March 5th, 2020 - latest update on April 7th, 2020

The coronavirus or COVID-19 is causing a number of issues that will adversely affect the automotive sector:

  • Loss of vehicle sales in worldwide (China in February-March, elsewhere in March-April)
  • Loss of vehicle production in worldwide, with the threat of infection forcing closure of production facilities in Europe and North America
  • Loss of vehicle exports to China
  • Loss of supplies from production facilities in China being exported to vehicle assembly plants outside of China
  • Infection of staff traveling back from facilities in China and other affected areas disrupting operations in facilities outside of China

Smaller effects include:

  • Loss of vehicle exports from China (General Motors, just 3 percent of output volume)

Ethan Harris, Head of Global Economic Research at the Bank of America, said the disruption to automotive may last into May or possibly longer, adding, “In terms of the impact on global production, the shutdown outside of China will likely become bigger than the impact from China.”

UPDATE (April 7th, 2020): The guidance on the global loss of vehicle sales, production and electronic system demand has increased further than the 4.0M unit, $3.7B and -4.4 percent estimate earlier in March - LMC Automotive now estimates a 15 percent decline in 2020 light vehicle production against its earlier forecast in January 2020 to around 76M units or by around 13M units.  By late April 2020, Strategy Analytics will publish the detailed effects of this reduced vehicle production on electronic systems, semiconductor and sensor demand.  But in the meantime, please refer to the scenario planner below.

Loss of vehicle sales

UPDATE (April 7th, 2020): According to the China Association of Automobile Manufacturers (CAAM), production and sales of light vehicles in February 2020 were 285,000 and 310,000 units respectively, down by 79.8 and 79.1% (or by 1.1M and 1.2M units) against the same month in 2019 (figures for March 2020 are not yet available).

  • LMC Automotive has recorded a loss of vehicles sales in China by 80.4% in February 2020 (equivalent of 1.2M units).
  • UPDATE (April 7th, 2020): According to the China Automobile Dealers Association, footfall in Chinese car dealers on April 3rd was 66.4% of normal levels, average revenue from new vehicle sales was 63.8% percent of normal levels and average parts and service revenue was at 66.8% of normal levels.  This suggests a slower return to normality and no sign of a compensatory "bounce" in sales - but resulting in further loss of sales. 
  • Similar volumes have been estimated for loss of vehicle sales each in Europe and North America, with JD Power estimating a 41 percent decline in US sales in March 2020 (over the same month in 2019) and that 2020 sales would hit between 14M and 16M, down by around 1.8M units (down 11 percent against 16.8M sales recorded for 2019).  Further losses in sales are also expected in April (and even in May should the lockdowns continue).
  • UPDATE (April 7th, 2020): According to Reuters, passenger car sales in Germany fell by 38% to 215,000 units in March 2020, a fall of around 132,000 units.  According to the SMMT (Society of Motor Manufacturers and Traders), light vehicle sales in the UK fell by 44.4% to 254,684 units in March 2020, a fall of around 203,000 units.  Guidance from the SMMT suggests UK sales in 2020 to fall by 23% to 1.7M units, a fall of around 517,000 units.  If assuming a continent-wide 40% fall in passenger car sales for March 2020, based on the March 2019 data from ACEA (European Automobile Manufacturers Association), this could suggest a fall of around 1.2M units.  Passenger car data for March 2020 by ACEA will be released on April 17th.
  • US dealers are attempting to alleviate the impact by moving more sales effort online and deliver vehicles directly to the homes of purchasers and to move as much of the transaction remotely, such as pick-up/drop-off servicing.  Annual safety checks on vehicles in some European countries are being deferred to later dates.
  • The University of St. Gallen, Switzerland, has estimated that 2020 car sales in Western Europe will have decreased by 19 percent because of the virus (equivalent to a 9 percent decline globally).  Professor Ferdinand Dudenhoeffer said that the recovery back to 2019 levels will not appear until 2030.  Auto makers Daimler, Jaguar-Land Rover and Renault are financially the weakest and the most exposed, according to credit ratings agencies.  OECD secretary general Angel Curria has also said that the effect of the virus on the global economy has been worse than the 2008 financial crisis and warning of U-shaped long period of recession before any sign of a recovery.  The lockdowns and social distancing has effectively meant the loss of many jobs in the hospitality sectors, which employed 11.9M people in Europe (in 2016, according to Eurostat) and 16.9M people in the US (US Bureau of Labor, December 2019), as well as a large section in retail and travel.  While Hyundai in the US is extending credit for existing customers and that base interest rates have fallen, it remains to be seen how auto makers and the consumer loan sector will react in the face of falling new car sales. 
  • Among the loss of vehicle sales would likely to include a small volume of high value models imported from outside China, mainly of European premium brands.
  • While it may be assumed that lost sales in early months could be balanced by higher sales in later months, this will not occur fully as the crisis will also cause permanent job losses and a declining economy. 
  • Hubei province, China, ended its lockdown and car sales have now returned, 61 days later.
  • UPDATE (April 7th, 2020): With the fear of infection, many key workers are shunning public transit in favor of purchasing used or compact cars to commute to work.

 

Loss of vehicle production

UPDATE (April 7th, 2020): LMC Automotive now estimates a 15 percent decline in 2020 light vehicle production against its earlier forecast in January 2020 to around 76M units or by around 13M units.  

An earlier LMC assumption is of a drop in vehicle production in China of between 3 and 5 percent, an equivalent of between 731,000 and 1.22M units in China (against 2019 vehicle production of 24.367M units).  However, given the slower recovery observed at present, further sales losses will also adversely impact vehicle production going forward in April (China) and May (outside China).  

  • With the lockdown imposed in the last week of January, vehicle production was halted across China and remained so into February.
  • Vehicle assembly plants in China were due to restart production by the last week in February 2020, but in some instances, they had been delayed.  Nissan and Honda had restarted in late March instead, since these auto makers have production facilities in Hubei province, at the epicenter of the contagion.  Other auto makers in Hebei include Dongfeng (which is headquartered there), GAC, joint ventures with PSA and Renault. Tesla in Shanghai, China has started production earlier than other auto makers because it has complied with government requirements in supplying workers with masks and sanitizing fluid. 
  • Even with the restart, vehicle production in China is being disrupted by the lack of supplies from other facilities in China.  Also, vehicle sales had been disrupted as consumers are barred or were wary in visiting dealer showrooms.  However, online car sales continued, with some vehicle deliveries made by dropping key fobs from by drones. 
  • Vehicle assembly plants outside of China have closed because of the lack of supply from China or were “only weeks” away (since early February) from running out, e.g. FIAT in Kragujevac, Serbia; Jaguar-Land Rover in the UK; General Motors (stocked until the end of March 2020) and FCA in the US, where the steering column in the Jeep Wrangler was supplied by Nexteer's Wuhan facility. 
  • Hyundai in Ulsan, South Korea was among the first assembly plants outside of China to close for lack of supplies.  Korea has seen significant disruption in late  February, given that there is a significant cluster of infected people located around the city of Daegu, which has forced other Korean assembly plants to close.  However, with mass testing for the virus, Hyundai Ulsan (and other assembly plants in Korea) quickly resumed production on March 2nd. 
  • The worst affected regions of the world for coronavirus include Iran and Italy, where the molded plastic supplier, MTA, has a facility located in Codogno.  Italy went into lockdown a week or two before other European countries.
  • Among the worst that were affected by Chinese supplies, they include Tier 1 vendors Bosch (steering), F-Tech (pedals, transferring production to the Philippines), Showa (steering for Honda) and Webasto (sunroofs), the latter having infected staff forcing the temporary closure of its Stockdorf, Germany headquarters.  Other domains worst affected include suppliers of infotainment systems and components.
  • To prevent the spread of the virus, including fears of a "second wave" of infections, many countries have closed their borders.  Business travel has also been banned by many companies, where infected staff have been found at BMW in Munich and Ford.
  • Most, if not all, vehicle production facilities in Europe are to close for at least three weeks for staff welfare and limit the spread of the virus, as well as from the lack of supplies and vehicle sales (lack of orders from auto makers).  This has been followed in the US, starting with the agreement between the UAW and the Detroit 3 auto makers.  Other auto makers quickly followed suit when discovering workers had tested positive for the virus, with a knock-on effect closing parts assembly, such as at Bosch, Continental (half of staff going into part-time working), Marelli and Nexteer (or moved to temporary working, like at IEE), and some semiconductor facilities, such as at ELMOS (half of staff going into part-time working) and Melexis.  The closing of the borders between European countries has made it difficult to send parts across the continent to vehicle assembly plants, which can only store 1-2 months' inventory because of Just In Time. Kia in West Point GA and Volkswagen in Russia had to close because of a lack of parts. 
  • UPDATE (April 7th, 2020): Outside China, nearly early every vehicle assembly plant had closed over late-March and early-April.  Some staff had volunteered to stay at parts assembly divisions at Ford and GM.  25 percent of staff at Tesla's Fremont facility remain to ensure delivery of vehicles to customers (as it does not have a dealer network). 
  • Resumption of production activity: April 6th: Kia Europe, Mazda Mexico, Volkswagen Mexico, Volvo Belgium; April 10th: FCA Poland, Honda North America, Mazda Thailand; April 13th: Mazda Japan, PSA Slovakia, Toyota Japan, other Japanese auto makers; April 14th: FCA Italy, Ferrari, Honda UK (provisional), Hyundai Europe, Volvo Sweden; April 19th: BMW Europe, Volkswagen Group (most of); April 20th: Aston Martin, Daimler Germany and France, Jaguar-Land Rover, Toyota Europe (excluding Russia); April 22nd: Daimler Hungary; April 27th: Nissan USA; April 30th: BMW USA; May 1st: Honda USA, Nissan Europe; May 4th: Ford Europe; May 5th: Tesla USA; PSA France and Renault – subject to lockdown duration, Japan could also be subject to further closures should a state of emergency is declared.  Also closed in late-March and early-April included Avtovaz Russia, Ford Brazil, Ford India, Ford South Africa, Ford Thailand, Ford Vietnam, Hyundai India and Volkswagen Russia.  
  • Panasonic had scaled back battery cell production for one week and had closed for two weeks in late-March and early-April at the Tesla Gigafactory 1 facility in Nevada.  
  • LMC Automotive estimated that vehicle production in the US may have decreased by at least 30 percent in March 2020 (against March 2019).
  • China is also a major processor of lithium metal (that turns it into lithium carbonate and lithium hydroxide before going into battery cells for electric vehicles).  Albemarle, Livent and SQM are investing in raising production outside of China (in Australia, Argentina and Chile), but the new facilities won’t be operational until 2021-2022.
  • With the falls in the stock market and the growing lack of investment because of the virus, as well as lacking supplier relations, is that start-ups in autonomous and electric vehicle technology will become increasingly vulnerable, with Starsky Robotics recently filing for bankruptcy.  120 contract staff at the AV developer start-up Zoox have been laid off.  Mahindra has also pulled investment in electrifying the model line-up at Ssangyong.
  • UPDATE (April 7th, 2020): The impact to the global economy and financial markets mean that many auto makers and suppliers (especially in lower tiers) are now facing liquidity issues, forcing them to draw loan facilities.  This includes Delphi Technologies that may jeopardize its acquisition by BorgWarner and the car hire company, AVIS.  BMW, Honda and Nissan are among a number of companies "furloughing" or not paying staff during the plant shutdowns, as well as by dealer networks that are prevented from selling new and used vehicles - even online sales have been banned in Pennsylvania.

Loss of Automotive Electronic System Demand

From the January 2020 edition of the Strategy Analytics Automotive System Demand Forecast, demand for electronic systems in China is estimated to be at $73.9B for 2020.

  • With LMC Automotive assuming an adverse effect of between 3 and 5 percent in light vehicle production in China, assuming the same percentage decrease in system demand (although the effects to which auto sector and model segments are not known), then this is an equivalent of a loss of between $2.2B and $3.7B.
  • Following the Fukushima nuclear disaster in 2011, there have been attempts to broaden the supply chain to include a second preferred supplier on more commoditized components and on a more regional (Asia, Europe and North America) level. 
  • However, cost pressures, worsened by the need to invest in CASE technologies and by the general decline in vehicle sales, will prevent a complete divestment of supply away from a significant market region like China.
  • Ride-sharing services are suspending vehicle pooling offerings to limit the spread of the virus.  Business for ride-sharing and taxi cabs have decreased significantly as social distancing and lockdowns come into force in many cities.  Uber reported a 50 percent reduction in rides in US cities worst affected by the virus.  
  • UPDATE (April 7th, 2020): Based on the experience of Chinese ride-hailing services under the lockdown, retro-fitments have been made to vehicles that include a perspex shield protecting the driver from being infected by the customer.  Future car sales may favor certain model segments, such as minivans, or bespoke models like the Geely LEVC TX e-city, that can accommodate these shields.  Ride-hailing services will also favor interior designs that are easier to clean. 
  • For business opportunities, Chinese auto makers have launched new models with N95-compliant air filtration for HVAC systems, as already implemented by Tesla and Volvo on their models.  
  • UPDATE (April 7th, 2020): Ultraviolet light has also been considered to kill the virus trying to enter the cabin, by Jaguar-Land Rover and Yanfeng.  However, there are technical challenges in preventing occupant contact with UV-C light, should it reflect off shiny door handles, for example.  However, chemical treatments will continue for ride-hailing services, which would add cost and reduce drivers' time to earn revenue.
  • Deliveries have also been made by autonomous vehicles in China, for example using Neolix vehicles, where quarantines have caused driver shortages.  Otherwise, light commercial vehicle demand will grow as consumers, under lockdown, favor home deliveries of food and from the growth in online retail - please refer to the user experience research, COVID-19: Strategy Analytics Assesses the Long-Term Impacts of the Pandemic on Consumer Purchasing Preferences.  But such vehicles, on average, have a lower electronic content than passenger vehicles.
  • Auto makers are also looking to assemble face masks and non-invasive ventilators to support health workers and hospitals during the pandemic.
  • UPDATE (April 7th, 2020): Elsewhere, aftermarket and repair parts may become harder to source following the pandemic, according to Michael Dunne of ZoZoGo.

 

Coronavirus Automotive Scenario Planner

UPDATE (April 7th, 2020): Strategy Analytics has published a spreadsheet scenario planner, which was updated on March 27th, which now assumes an adverse scenario of a 16% fall in system demand Two default scenarios are saved in the planner that can be re-called. 

  • The first is the standard scenario, as published in the January 2020 Automotive System Demand Forecast.This was prepared before the severity of the virus outbreak was known.
  • The second scenario has been developed by Strategy Analytics to present one view of how coronavirus may impact global light vehicle production and the consequent Automotive System Demand.
  • Users can also create and save their own scenarios by entering their estimates for light vehicle production growth in each region in 2020 and 2021.
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