Coronavirus and the automotive market: what are the implications?

Despite the overwhelming uncertainty, SNECI has estimated the overall impact of the COVID-19 crisis on the automotive market in 2020. These forecasts reflect our personal views based on the current situation.

The Impact of the Novel Coronavirus on the Chinese Automotive Market

Chinese car market was the first to suffer the negative economic impacts of the pandemic. In the first two months of 2020, auto sales were down by 42%. In March, sales have likely decreased by another 25%, as buyers did not go back to the showrooms in full force. By the end of the first trimester, sales will have dropped by 36%.

Still, the market may bounce back rapidly in the next few months. Recent surveys have shown that Chinese consumers are considering buying a car to avoid public transportation, taxis, or ride-hailing services, as they continue to be concerned about the virus.

The biggest issue for China now is similar to the one that Europe faced only one month ago: a potential disruption in the carmakers’ production lines. As the automotive supply chain is globalized and most industrial countries are currently in lockdown, suppliers outside of China cannot deliver the parts abroad. While the localization ratio is over 95% in China, this does not prevent it from having disruptions. You only need one missing part from a Tier 1 or even Tier 2 supplier to stop an entire carmaker or the whole industry (remember Renesas in Japan in 2011).

Therefore, we believe that the Chinese auto market in 2020 will decrease by 12%, nearly 3 million vehicles, provided that the suppliers outside of China restart their production by the end of April.

How Coronavirus is Impacting European Car Market

The European automotive market already faced several challenges at the start of 2020 with new legislation imposing very strong targets on CO2 emissions (95 g/km, which represents an approximately 20% decrease from last year).

The car market in Europe was down even before COVID-19 hit, with a 7.4% drop in registrations in the first two months. In March, sales have probably declined by two thirds. With all carmakers’ plants halted since the second half of March, potential shutdown of the plants until at least April 20th, and countrywide lockdowns still in full force until the end of the month, April car market results will be even lower.

Even if carmakers’ plants restart by the end of April, they will not be capable of producing at full capacity right away, as restarting a full supply chain is a complex task. Moreover, the working procedures in the plants will have to be adapted to sanitary restrictions such as one-meter distance between the employees and the disinfection of parts.

We should also remember that the lockdown across China was only 6 weeks long. Wuhan, the epicenter of the pandemic, was an exception, with an 11-week quarantine. For Europe, we predict the lockdown to be even longer as the governments waited too long before taking strict measures.

The overall economy will, therefore, take a bigger hit in Europe than in China. The majority of experts predict a 5% recession in Europe in 2020, comparing to a 3-3.5% expansion in China this year.

As a result, buyers will delay their car purchases in 2020 and the offer shock will be followed by an even bigger demand shock.

Given that 2020 was already a challenging year (a 5% market decrease would have been a good number before the COVID-19 crisis struck) and that the additional loss in production in March, April, and May will be around 10%, we can expect at least a 15% decrease in car sales this year. Taking the demand shock and the upcoming recession into account, we believe that the market will lose 10 to 15% more, leading to an overall 25 to 30% decrease compared to 2019 and resulting in a loss of 5 to 6 million vehicles in a year.

If we look at each carmaker separately, we could expect companies with large productions in the most afflicted countries (Italy and Spain) to be the most affected. These companies include Fiat, the largest carmaker in Italy, Ford with 40% of its European production in Spain, and Renault-Nissan and PSA, both with around 30% of their European production in Spain. Of course, this level-one analysis does not take into account the particular commercial successes of each brand. For example, PSA is currently showing very strong demand for its new 208 and 2008 vehicles.

Coronavirus’s Impact on Car Sales and Production in North America

North America was the last region to be touched by the coronavirus, yet it failed more than most to contain it, resulting in more than 300 000 cases in the US in early April (when car registrations in the US represent over 85% of car sales in North America). Furthermore, there are a lot of projections stating that the number of COVID-19 cases will surpass 1 million in the US by the end of April.

While the North American market resisted the pandemic better in the first quarter compared to Europe or China (sales decreased by less than 5%), the virus will definitely have an impact on its full-year results.

It is difficult to assess right now to what extent coronavirus will influence the North American car industry. However, if we look at the 2008-2009 crisis, the auto market here was particularly hard hit, partially due to the lower welfare protections here compared to Europe.

Consequently, we believe that the auto market in North America will decline drastically over the next few months, despite carmakers promoting zero-percent financing for up to seven years. We predict that in 2020, the market will be down by 25 to 30%, resulting in a loss of 4 to 5 million vehicles over the year.

The Global Impact of Coronavirus on the Car Industry

We have looked in detail at the three main automotive markets worldwide. If we extend the forecast for the market globally, we arrive at a decrease of 19 million cars (from around 89 million to 70 million cars), which represents a drop of 21% from 2019. This is based on several assumptions derived from today’s figures, but, unfortunately, we are quite confident that the figure will not be too far from this number.

What about 2021?

While 2021 seems far away, carmakers and suppliers need to understand today how the automotive industry will bounce back and what structural changes the coronavirus crisis will bring to the market. Within our Strategy & Market Study Business Unit, we have developed several scenarios various hypotheses into account. Please feel free to contact us if you would like to know more about the 2021 auto industry forecast.