Economic Impact on Automotive Industry
With the continuous spread of the novel coronavirus across the world, automakers are taking extreme measures in the form of plant closures to halt the spread of COVID-19. The situation remains uncertain as more European companies suspend work and the US and APAC automakers extend shutdown periods. The automakers' plans on North American production are an effort to slow the spread of the COVID-19 virus; however, currently the region is the global epicenter of the outbreak, with the daily number of confirmed cases outstripping the number in any other region. In the US and Canada, the response of government has been a combination of state or provincial, federal, and local measures. In other regions, the countries' governments are applying seemingly ever-more stringent conditions on social interaction, travel, and workplace attendance. These regions are experiencing similar situations, which is having a marked effect on economy as well as society and causing massive economic disruption, with the automotive industry at the center of this turmoil.
The regional impacts of the pandemic outbreak are highly variable, but as it spreads, the status in the harder hit areas provide a glimpse of what may be witnessed in the near future. China saw a 79% drop in the automotive market in February 2020. As a result, Chinese auto manufacturers have petitioned the government to stimulate the market through subsidies, tax breaks, and temporary reductions in emissions requirements. The initial epicenter of the global outbreak is Hubei province, which is one of the key regions of automotive production in China. Utilization within automotive plants in Hubei remains far below capacity, with many plants fully shut down, and the recovery process may require months to get back on track, post the outbreak. Impact on Automotive Production
In Europe, many of the automotive groups, including Volkswagen, Fiat Chrysler Automobiles N.V. (FCA), and Groupe PSA, have shut most plants across the continent, effectively halting the entire supply chain for the time being. Ford, other key automotive player, has also announced a halt of production activity throughout Europe. Retail activity is currently at a standstill, as many European countries have moved into full lockdown. EU-wide production losses due to factory shutdowns have amounted to over 2 million motor vehicles so far, which includes passenger cars, vans, trucks, buses, and coaches.
The original equipment manufacturers’ (OEM) production in the US has come to a halt, with the “Big 3” OEMs (Ford, FCA, and GM), have agreed to temporarily halt production. On the retail side, OEMs are focusing on driving sales through financing incentives and other consumer-friendly offerings. With the countries under lockdown, retail activity is also experiencing significant slowdowns. A prolonged slowdown of retail sales is likely to have far-reaching impacts, as OEMs may struggle to meet demand due to capacity constraints once the market picks up. Moreover, as OEM production shuts down, the automotive supply chain is also closing, and suppliers do not have the ability to stockpile inventory.
In response to these impacts, according to the National Automobile Dealers Association (NADA), the forecasts for US light vehicle sales in 2020 have been reduced to 14.5 million units, compared to 17 million units in 2019, with further reductions possible if the pandemic is not controlled.
Majority of the automakers have decided to temporarily stop automotive production and the details are mentioned below. Ford
Ford shut down all European and North American production on March 19, with an intention to reopen facilities and restart production on March 30, though, the company on March 31 delayed that goal indefinitely. It planned to start ventilator production at one of its US facilities on April 20. Production of Ford vehicles and engines across the Americas and Europe was expected to resume on May 4 at the soonest.
On restarting production, Ford planned to work with the United Auto Workers (UAW) union leaders in the US in deciding how best to structure the restarting of plant operations and implement new health and safety procedures. In addition, the company has temporarily closed the final assembly building of the Michigan Assembly Plant (MAP) in reaction to an employee having tested positive for the COVID-19 virus and to thoroughly clean and disinfect the building. American Honda
On 18th March, American Honda announced that it is halting North American production till 31st March. The decision applied to vehicle manufacturing and assembly, as well as to Honda's engine and transmission plants in the region. According to company’s statement, it will see a production loss of about 40,000 vehicles and it plans to continue to evaluate conditions and make additional adjustments, as necessary.
Fiat Chrysler Automobiles announced on 18th of March about its North American production plans. FCA had planned to halt production at its plants across North America until 31st March, with the plants being shut progressively. It also temporarily closed its plant in Sterling Heights, Michigan, after an employee tested positive for the COVID-19 virus. This issue impacted the first and second shifts at the plant on 18th March. According to an FCA spokesperson, the automaker's Italian plants were expected to open on April 14, but as of April 15, the company said it will continue to follow guidelines from the Italian government. The automaker plans to evaluate other European plants in the coming weeks. Kia
On 24th March, Kia announced that it would suspend production at its manufacturing plant in Georgia starting March 30th. The shutdown was expected to last two weeks, originally planned to restart production on April 13, but could not resume. During the production stoppage, the company has been performing additional cleaning and disinfecting processes in workstations throughout the plant. Volkswagen
Volkswagen, on 31st March, announced the extension of the production shutdown at its German factories owing to the decline in demand for vehicles and continuing challenges in the supply chain. However, on 27th April, the company reopened the world's biggest car factory at Wolfsburg in Germany.
Amidst the COVID-19 outbreak, investors and manufacturers are pulling back the production and reconsidering investments. This is expected to act as a key headwind for the growth of the global automotive market. The halt in production of vehicles has affected the demand for braking systems globally. The pandemic is expected to have a negative impact on the global braking systems market in the short-term (2020–2021). However, the long-term growth of the market is expected to remain positive. Impact on braking systems Industry Impact on Supply Chain
All countries across globe are trying to strike a fine balance between protecting health, minimizing economic and social disruption, and respecting human rights. The growing spread of corona virus leads to disruption in the raw material markets. Restrictions to shipping and industrial production are affecting multiple supply chains. Distribution of components is the key process in manufacturing industries, which is facing challenges such as staffing of warehouses, a need for direct distribution and more intelligent and responsive allocation across channels due to pandemic which led to pressure on supply chains. The impact on the US market from the disruptions in China will be significant and will have a huge effect in the world economy and badly disrupt global supply chains. Impact on Raw Materials
Automotive manufacturing possesses complex process, with subcomponents required to assemble a single product which is sourced from several countries across the globe. The raw materials required to manufacture these subcomponents could also come from different countries and continents, and the finished products will again be transported all over the globe. The dependency on logistics make import, export of raw material and finished product more complex due to disruption in supply chain. Cash Flow Constraints
Supply chain disruptions have further created cash flow implications across the extended supply chain. SMEs are currently struggling for profitability, the companies which have low cash reserves are totally unstable. However, large scaled manufacturers still appear to be in good financial condition, but they are not sure, when the supply chain will return to normal. A decline in cash inflow resulted from the drop in demand, and majority of companies require high working capital to remain in sync. On the other hand, demand for passenger vehicles is likely to be muted, as this segment is highly impacted by consumer purchasing power and economic/market sentiments. Thus, continued cash flow tightening will impact the automotive market further. Impact on World Trade
World trade is expected to witness a fall between 12% to 30% in 2020 as the COVID 19 pandemic disrupts normal economic activity along with life around the world. The unavoidable declines in trade, production, and output will lead to painful consequences for businesses, on top of the human suffering caused by the disease itself.
According to the United Nations, the global economy is projected to contract by around 1% or more instead of registering 2.5% growth projected by the World Economic Situation and Prospects report 2020. The world economy contraction rate is expected to be more than 1% or possibly more than what was experienced in the global financial crisis in 2009 (i.e., ~2.5%) if the governments (in the developing as well as developed countries) fail to provide required income support and help lift consumer spending.
The restrictions on movement and promoting social distancing to slow the spread of the disease mean that transport, travel, and labor supply are today directly affected in ways they were not during the financial crisis in 2008-09. Whole sectors of national economies have been shut down, including restaurants, hotels, tourism, non-essential retail trade, and significant shares of manufacturing.
The COVID-19 coronavirus situation is evolving rapidly, creating considerable challenges to the health system, and causing disruptions to supply chain operations.
