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Auto recovery may take years, with $72 billion in new debt to pay off amid projected sales slump

Jordyn Grzelewski
The Detroit News

The auto industry was already facing financial headwinds. But new challenges courtesy of the coronavirus may take auto manufacturers and suppliers years to overcome, says a new outlook detailed Thursday by Alix Partners LLP, an industry consultant.

"We were already on the backside of the (global sales) peak, but (the coronavirus) accelerated this in a very unprecedented way," Mark Wakefield, global co-leader of AlixPartners’ automotive and industrial practice, told The Detroit News. "While there will be some snapback in terms of filling inventories, both the demand and supply side will be hit for some time."

Assembly line workers at the General Motors Detroit-Hamtramck plant continue working on the Chevrolet Impala as the plant will be converting from internal-combustion production to EV.

AlixPartners warned last year that the auto industry was entering a "profit desert," driven in part by the shift to the autonomous and electric vehicles that require heavy investment but which are unlikely to generate returns in the near-term.

Then came an eight-week production shutdown, induced by the coronavirus pandemic that caused the industry to bleed billions of dollars and led manufacturers and suppliers to assume a whopping $72 billion in debt in just a matter of weeks. Now it may take half the decade for the industry to bounce back.

Auto sales have been on the decline since 2017, when global sales peaked at 94 million. AlixPartners projects 2020 sales will be down to 70.5 million globally. The firm projects 13.6 million in sales volume in the U.S. this year, down from 17.1 million last year.

Overall, it may take until 2025 for the industry to get back to prior-peak sales volume, AlixPartners predicts. Compared to 2019, the industry faces a cumulative volume drop of up to 36 million vehicles this year through 2022.

The recovery of the industry is expected to vary by market, with prospects for China — which shut down first, reopened earlier and now is rebounding — and the U.S. looking stronger than for Europe, according to AlixPartners' outlook. 

In the short term, the industry appears poised for a sharp rebound as manufacturers rush to fill depleted inventories and consumers shy away from public transportation and ride-sharing due to the coronavirus. But longer-term, AlixPartners expects a slow recovery hamstrung by reduced consumer demand and the need to pay off debt.

Returns on capital in recent years had already dropped by 47% for automakers and 36% for suppliers from Great Recession levels, as sales softened and the industry poured money into the Auto 2.0 sectors of mobility, autonomy and electrification.

Now, with their financial challenges exacerbated by the coronavirus, automakers will have to make some tough decisions about programs that are considered to be the future of the industry. "You still have to invest in the future," said Wakefield. But, "the cash available for that is just less."

The industry is still in the early stages of developing autonomous- and electric- vehicle technology, an effort that requires significant investments with high fixed costs but little return to show for it. Those sectors are not expected to be profitable for at least several years.

"You're shifting your investment and capital into products that aren't returning the level of profit and don't have the scale of the current products in your portfolio," said Wakefield.

Cuts and delays to AV and EV programs are likely (and some have already been announced). As such, the recent trend of automakers teaming up with competitors and technology startups on these ventures will likely accelerate as a way to reduce costs.

A risk the U.S. auto industry's recovery faces is a second wave of COVID-19 cases, Wakefield said. While China has effectively contained the virus and Europe is trending in the right direction, the U.S. has been less aggressive about containing the disease even as cases continue to rise here. 

The industry must remain focused on successfully executing the restart of operations, stimulating demand and staying on track for a bevy of product launches that are slated for the next few years, according to the report.

In the meantime, expect major automakers to deepen cuts they have been making over the last few years.

"We do believe almost all OEMs will address structural costs," said Stefano Aversa, AlixPartners' chairman of Europe, the Middle East and Africa. That will likely mean workforce cuts and plant closures, especially because some automakers continue to operate more plants than they need to meet their share of market demand.

jgrzelewski@detroitnews.com

Twitter: @JGrzelewski