Fitch Solutions expects global automotive production to decline -11.5% on-year in 2020 as a result of Covid-19-related lockdown measures and supply chain disruption.
The current crisis has hit the industry harder than the 2008/09 global financial crash. “Even back in the global financial crisis the industry could still operate, so companies could still produce, dealers could still sell,” Fitch Solutions autos research head Anna-Marie Baisden said during a webinar monitored by Kallanish. “What we’re expecting now is… actually more than double the decline during the global financial crisis.”
A second wave of Covid-19 could push the automotive sector recovery into 2022 instead of the mild recovery currently forecast from 2021.
Carmakers have taken on vast credit to heavily invest in recent years into electrification and autonomous vehicles. These are things that have not yet provided a return on investment, and now their income has been weakened further. This will spell a difficult operational environment for these companies in 2020-21.
Electric vehicles (EV) will, however, benefit from pollution concerns linked to Covid-19, a respiratory disease. Consumers are seen becoming increasingly cautious of climate change and their carbon footprint post Covid-19. Governments will promote the use of electric cars as these have zero tailpipe emissions and contribute to CO2 and NO2 reduction, Fitch Solutions says.
EVs will be at the centre of the production restart for at least four reasons. They are more automated and less labour intensive; lower scale, cheaper in nominal terms, and more commercially viable for automakers with challenging operational costs. Moreover, ramping up production of EVs coincides with the requirement to reduce average fleet emissions in Europe. Finally, they typically require fewer component parts and narrower supply chains at a time of heightened supply chain risk.
As a result of the pandemic, “…automakers will increasingly look to diversify their supply chains away from China,” said Fitch Solutions principal autos analyst Joshua Cobb. There will not be a mass exodus but automakers will reduce their capacity in China and relocate closer to their primary markets.
Nevertheless, “…there’s no other country that can come close to China when it comes to manufacturing capability,” Cobb observed. India comes close in terms of labour costs, but still needs significant development to absorb that capacity from China.
Morocco – where French carmakers have established manufacturing capabilities – could benefit from carmakers leaving China or Algeria, where operational risk is rising. Chinese automakers could benefit from the exit of carmakers from Southeast Asia.