Published in Manufacturing

Automotive analysts see shifting dynamics amid coronavirus spread

BY Sunday, March 15, 2020 07:20pm

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The automotive industry is scrambling to strike a balance between near-term execution and unsteady industry disruption from the novel coronavirus outbreak. 

That’s according to industry experts who say the effect of the virus, which has been spreading around the globe since late December and shut down production in specific regions, has shifted forecasts for global automotive production and U.S. sales downward. 

Indeed, Gov. Gretchen Whitmer announced the state’s first two presumptive positive cases in Oakland and Wayne counties on March 10, followed by a state of emergency declaration.

Earlier this month at the West Michigan Automotive Suppliers Symposium in Grand Rapids, Mike Wall, director of automotive analysis in Grand Rapids at IHS Markit, forecasted light vehicle sales of 16.8 million units in the U.S. this year, in the segment that includes cars, utility vehicles and pickup trucks. 

Already, that outlook is changing as COVID-19 continues to develop across the country, he told MiBiz last week, before the declaration of a national emergency. 

As of this report, IHS Markit was still finalizing a revised sales projection, but Wall expects the new forecast to drop to 16.5 million units. 

“Everything is happening so quickly and there is so much volatility that given the circumstances, 16.5 (million) will still be a very good year,” Wall said. 

To calculate domestic sales data, IHS Markit is focusing particularly on consumer confidence, economic development, GDP performance, job creation and job growth. 

“The (stock) market has only just recently melted down, so that’s where that impact and influence on the consumer is going to be important to watch,” Wall said. 

Similar dynamics inform IHS Markit’s global light vehicle production forecasts as well. However, the formula is more complex and will take more time to compute.

“There are definitely some downside risks to the production forecast, for sure,” Wall said. “It’s just a matter of trying to quantify that right now.”

Production effects

Production where the coronavirus started spreading in China — a region that dealt with a dramatic decline in vehicle production last year because of economic headwinds, trade tensions and lending crackdowns — is dipping further and faster than the rest of the world at the moment. The effect of coronavirus on China and other global markets will outweigh any modest production gains that were predicted in the Americas, according to Wall. 

As of earlier this month, he had forecasted global production to drop to at least 87.2 million units in 2020, down from 88.9 million units last year.

“There are gigantic efforts being taken to ensure the state of the supply chain,” Wall said. “We still have shipments coming in — they’re starting to get leaner but through monumental effort, so far, so good on that front.” 

Based on a rating of “component risk” and the size of purchases, IHS has pinpointed some global OEM plants that appear to be more exposed to shortages from production in the Hubei province of China, the epicenter of the coronavirus outbreak. Ford Motor Co. plants in Turkey and Romania and a General Motors plant in Egypt are among the most at risk. 

The top components that are produced in the Hubei region and shipped throughout supply chains include brake calipers, HVAC control panels, brake actuation systems and exhaust manifolds, according to the data. 

Shifting demand

Disruptions like coronavirus affect some vehicle types more than others in the domestic sales market. For example, during the Great Recession, pickup truck sales dropped because of fewer industrial sales, the consumer credit crisis and increased gas prices. At the same time, car sales jumped. During the recovery, while cars and utility vehicles pivoted market positions dramatically, pickup truck sales ticked up and then remained reliably steady. 

For now, Wall expects each segment to continue along trend lines — utility vehicle sales upward, cars downward and pickup trucks steady — but it might be too soon to predict the fundamental effects of coronavirus and the corresponding economic consequences on market segments. 

Last week, crude oil prices dropped to half of what they were in January. The sharp decline is tied to coronavirus and how governments and individuals react to its spread, quarantines and social distancing. The outbreak has lowered demand for travel and, as a result, dwindled demand for oil amid an oversupply in the market, according to a recent report from the University of Alabama.

Shifting market segments, if they happen, could affect an already vulnerable crossover utility vehicle (CUV) market. New model launches of CUVs are growing faster than the consumer segment, according to IHS Markit. 

In 2017, 95 vehicle models sold in the U.S. were classified as CUVs, up from 23 models in 2002. This year, automakers will try to sell 120 different models of CUVs. 

“Based on U.S. sales, we’re not growing the segment enough to absorb all that,” Wall said. “Planning volumes are going to be super critical, probably more than ever. This is one of those segments that everybody wants to be in because nobody wants to be in sedans where volumes are collapsing, but I’m going to keep beating this drum because it is a risk out there for suppliers.” 

Watching credit

Going forward, automakers and suppliers should continue to watch the speed at which coronavirus spreads and the corresponding effects on global economies, according to Wall. While consumer confidence is a coincidental indicator, job growth and job creation on a month-to-month basis can be a more reliable predictive measure, he said. Specific to the automotive sector, Wall favors tracking used vehicle prices to take a quick pulse of the industry as a whole. 

“If we start to see used vehicle prices collapse or go down significantly, that makes it tougher to sell new vehicles,” he said. 

But ultimately, the “big linchpin” indicators to watch will be related to credit, according to Wall, who said 85 percent of vehicle sales are financed. 

“The hope among all hopes is this does not translate into a credit crisis, which is not in our forecast,” Wall said. 

The Federal Reserve Open Market Committee reduced the federal funds rate by a half percentage point this month, the largest decrease since the 2008 financial crisis. 

“We have to keep our eye on the credit ball,” Wall said. “Cutting rates and trying to make sure we keep the credit markets functioning is the number one thing of importance to keep us from resembling more of that 2008 downturn.” 

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