- Period of unprecedented innovation in the sector
- Car manufacturers are among the largest investors in R&D worldwide
- Highly impacted by the COVID-19 crisis
- Structural decrease in sales and registrations in all markets worldwide
- Deterioration of credit risk in several region across the world, including the United States and United Kingdom
- Increasingly restrictive anti-pollution standards requiring heavy investments
- High uncertainties on the global automotive supply chain notably due to the knock-on effects of the trade war
- Rising prices for car parts and equipment are affecting margins
The health crisis has strongly affected the global automotive sector. Supply has been reduced because of the consequences of the closure of several plants around the world in the first half of the year. Meanwhile, demand has been impacted by consumers’ reduced 'appetite' for this type of durable goods, in a period of economic uncertainty linked to the consequences of the health crisis. Vehicle registrations and production are collapsing. Globally, car sales contracted by 39% year-on-year in March 2020. Vehicle production fell by 24% in the first quarter (Q1) of 2020 compared to Q1 2019, and is expected to contract by 21.2% in 2020 according to a study by IHS Markit.
Economic growth should resume in 2021, following an unprecedented GDP contraction in 2020. Indeed, according to Coface, world GDP is expected to contract by 4.4% in 2020 and to rebound by 5.1% in 2021. However, even if sales in the sector start to recover, they should not be able to offset the losses of the first half of 2020. A gradual recovery was observed in Q2 2020, particularly in Europe and Asia. Nevertheless, the outlook for the automotive sector on the American continent, particularly in the U.S. (another important global market), remains uncertain given the poor control of the pandemic compared to the abovementioned regions, which are also important markets for the automotive sector.
Moreover, the sector is still undergoing a major transformation with the development of electric vehicles and increasingly restrictive regulations, which mainly concern CO2 emissions. The automotive industry is continuing to reconfigure itself with the rise of e-mobility and the emergence of new players in the electric vehicle and autonomous car segments. Traditional carmakers are forging new partnerships to face these new challenges.
Sector Economic Insights
Regarding the current conjuncture, the automotive sector is suffering from both the global economic crisis and the COVID-19 crisis, and faces a double shock of supply and demand. These shocks are massive and heavily affect the industry
Drastic containment measures in most parts of the world led to the closure of factories and dealerships in the first half of the year, thus causing the brutal shutdown of the sector. Indeed, as car production came to an abrupt halt, the number of produced vehicles collapsed. From a global perspective, in Q2 2020, a gradual and uneven recovery was observed in Asia and Western Europe. The easing of containment measures or their withdrawal, depending on the case, have enabled plants to reopen, which supports the recovery of demand. As for the United States, the outlook for the automotive sector is more uncertain, because the health crisis linked to COVID-19 seems to be controlled poorly since its arrival.
In China, sales were down 42% in Q1 2020 compared to Q1 2019. Production also fell sharply, with an 83% year-on-year decrease in February 2020. Production plants were able to gradually reopen in March, with the relaxation of containment measures, and half of the plants would have returned to full production capacity during the second quarter. However, production had to adjust to available inventories and declining demand.
The number of registrations in Europe decreased by approximately 26.5% in Q1 2020 compared to the same period in 2019. In France, according to the Comité des Constructeurs Français d'Automobiles (CCFA), the number of passenger car orders fell by 50.4% year-on-year in March 2020. For light commercial vehicles, a 91% year-on-year drop was observed in April 2020. Germany and Spain, Europe's two main car-producing countries, recorded a 97% drop in car production in April 2020 compared to April 2019.
In the United States, light vehicle sales decreased by 13% in Q1 2020. It is, in fact, less significant than in China and Europe due to the later arrival of the pandemic and less drastic containment measures. However, during the first half of 2020, the United States recorded a 23.1% decline in sales according to the National Automobile Dealers Association (NADA). Regarding automobile assembly, the United States recorded a 99% decline in April 2020 compared to April 2019.
Furthermore, the automotive sector remains in a state of transformation. Indeed, the institutional environment is pushing carmakers and equipment manufacturers to develop electric engines. Before the appearance of the COVID-19 crisis, new regulations and standards on polluting vehicles had been initiated. Some car manufacturers have asked for an easing of these regulations, which came into force in 2020 in Europe, because of the health context. On the side of the European institutions, pushing back these new rules to 2021 does not seem possible considering the environmental emergency. Consequently, the hybrid and electric segments of the automotive sector are most likely to recover quickly, as they benefit from public support, particularly in Europe, China and the United States.
The pace of recovery in the sector differs from one region to another, but remains difficult in all markets
Regarding Asia, the recovery is in progress but does not appear to be vigorous, except for China (7.5% economic growth forecasted by Coface for 2021 vs. 1% in 2020). Indeed, in China, the fear of taking public transport due to the pandemic may have had an impact on the willingness of households to equip themselves with a car. In order to revive the sector, the public authorities have implemented various incentives. For instance, at the local level, 10 cities are providing a subsidy for new energy vehicles sold between March and December 2020. At the national level, the government has extended its financial aid plan for the purchase of electric cars until 2022.
In the eurozone, economic activity is expected to contract by 9.7% in 2020, which is indicative of the low level of household consumption. A rebound in activity is expected in 2021, with economic growth anticipated at 7.7% by Coface. However, the sector is gradually recovering, a little later than in Asia due to containment measures that extended until May. Economic indicators are still below their pre-COVID levels, but production and demand are beginning to recover. For instance, registrations in France resumed, up 1.2% in gross terms in June 2020 compared with June 2019, partly thanks to the purchase subsidies introduced by the government. However, in Italy, Spain and Germany the recovery is more difficult. For example, in Italy, registrations decreased by 23.1% in June 2020 compared to June 2019. The United Kingdom is also in great difficulty, with registrations down by around 35% year-on-year in June 2020. The sector had already been strongly affected by the referendum on the exit from the European Union in 2016. Indeed, foreign manufacturers threatened to close factories in the UK due to the disadvantages of higher tariffs. Some have already materialized their threats, like Ford and Honda.
The American continent remains one of the main regions where the number of daily cases has continually increased, as infection levels remain very high because of poor crisis management, at the time of writing. However, light vehicle sales remain relatively resilient and do not collapse like in China or Europe, for instance. Dealers continue to sell cars at discounted prices, with price deductions averaging up to USD 4,000 per vehicle. Moreover, some factories are still closed and others have not reached their full production capacity. From a structural point of view, the automotive sector is undergoing major changes at a global level. These are mainly linked to a transition towards the decline of thermal engines in favor of electric ones. Coface expects this reconfiguration of the sector to continue in the medium- and long-term. The rise of e-mobility is mainly linked to the arrival of new players such as Tesla, a manufacturer of electric vehicles, among the world leaders. Faced with this trend, the entire automotive sector is investing heavily in Research & Development and is expanding its electric vehicle arrays in order to compete with these new players.
The COVID-19 crisis should contribute in accelerating the reconfiguration of the sector. Indeed, e-commerce and the overall digitalization of the economy have strongly developed during the health crisis, which has led to the emergence of new modes of consumption. A reorganization of distribution channels has been noticed in the automotive sector. For example, Tesla implemented its sales strategy by closing physical points of sale in order to focus on online sales. This has a dual objective: to adapt to consumer expectations and to save money in order to maintain financial stability in the context of the economic crisis linked to COVID-19. This situation could be an incentive for traditional manufacturers to establish partnerships, with the objective to lower costs. This is, for instance, the case of Ford and Volkswagen, who will jointly produce 8 million commercial vehicles. Partnerships between vehicle manufacturers and technology service companies are also emerging, like Google and Renault, who are teaming up to improve Renault’s industrial processes.
Automotive sector players must adapt to increasing regulations against pollution and global warming, which are becoming more restrictive
These measures are forcing manufacturers to make heavy investments to comply with standards. In Europe, the new CO2 standard active since January 2020 aims to limit the number of polluting vehicles sold. Non-compliant carmakers will be fined if their fleet of vehicles for sale emits more than a predefined threshold of CO2.
While the adoption of anti-pollution standards tends to converge naturally through the main automobile markets, the question of the homogeneity of standards between the main markets remains to be monitored, considering the risk of segmentation. In the United States, the legal divide on the Clean Air Act between the State of California and the U.S. federal government is a good illustration of this risk of fragmentation. California benefited from a waiver since the Obama presidency to set its own anti-pollution standards. The Trump administration revoked the waiver, but California, supported by 13 other states, decided to challenge the revocation legally. This legal battle offers little visibility to carmakers and automotive suppliers, particularly in terms of investment decisions.
Note for the reader: The “e-mobility” segment of the automotive sector includes fully electric vehicles, electric hybrids, and hydrogen vehicles.
Last update : September 2020