The automotive sector is facing its biggest challenge since the 2007-2009 financial crisis with 97% of light vehicle (LV) manufacturing plants in Europe and North America temporarily shut down.
Already, key players in the sector are negotiating financial life line and joint venture transactions with firms in other sectors.
Indeed, the rapid spread of the coronavirus (COVID-19) caught the industry on the back foot.
Reviewing the development on Tuesday, Mike Vousden, Automotive Analyst at GlobalData, a leading data and analytics company, said: “With potential customers suddenly stuck in lockdown all around the world, some original equipment manufacturers (OEMs) may see months without meaningful sales volume and suffer a subsequent hit to revenue and profitability“.
According to him, automakers are bearing the financial burden of supporting furloughed workforces and, in some cases, repurposing factories and supply chains to provide much needed ventilators and medical equipment.
“These extreme circumstances have pushed some automakers to access sizeable credit facilities to shore up their financial positions.
Most recently, Japanese giant Toyota announced it was seeking a JPY1 trillion ($9 billion) line of credit from Sumitomo Mitsui Banking Corp. and MUFG Bank. Of all the major Japanese OEMs, Toyota is the largest and has the best credit rating – Moody’s Investors Service previously held it at an A1 grade – but, with the virus placing incredible pressure on the auto industry’s earnings, it has since dropped Toyota’s grade to Aa3.
“The fact that these huge business enterprises are seeking to open new credit lines at this stage in the crisis adds to its gravity and a growing sense that even when recovery arrives, the financial consequences will be felt for some time to come.”
Speaking in a similar vein, another expert, Calum MacRae, : “In Europe and North America, GlobalData’s latest estimates show that some 2.5 million LVs have been removed from production schedules at a cost of $77.7bn in lost potential revenue – if it is assumed the stoppages last at least up until the end of April.
“This time, the threats are not the one-dimensional threat to demand precipitated by the financial crisis. Supply chains are affected and workforces are affected. It is challenging to manufacture vehicles and components without endangering a workforce. Safe manufacture, if possible, can only be achieved at a reduced capacity.”
Efforts to suppress the spread of the coronavirus (COVID-19), with social lockdowns widely implemented affecting 20% of the global population, have decimated vehicle demand overnight.
MacRae added: “In response, 168 out of 173 LV manufacturing plants in Europe and North America have called a halt to operations for varying amounts of time during March and into April. Additionally, production stoppages are not limited to North America and Europe, the virus is roiling the industry from Detroit, to Dusseldorf to Durban.
“What’s more, the shocks will ripple through the supply chain with supplier plants also being furloughed. It really is an unprecedented crisis, the in terms of its speed and scale. The auto sector faces its biggest existential crisis since the financial crash and subsequent recession of 2007-09.”
