Auto industry recovery from COVID-19 could take years, signaling slow climb back
Global vehicle sales could fall year-over-year by more than 20% in 2020, according to a new study, and not return to pre-COVID-19 levels until 2023 — another gloomy sign that contributed to the Dow Jones Industrial Average plunging nearly 1,900 points Thursday to its lowest since March.
The Dow fell 6.9%, the S&P 500 dropped 5.9% and the tech-heavy Nasdaq was down 5.3% over concerns a second wave of the novel coronavirus is hitting states that are re-opening their economies. And Federal Reserve chairman Jerome Powell offered a bleak economic forecast a day earlier, saying "the extent of the downturn and the pace of recovery remain extraordinarily uncertain."
"We all want to get back to normal," Powell said in a news conference, "but a full recovery is unlikely to occur until people are confident that it is safe to reengage in a broad range of activities."
That includes buying cars and trucks. The global vehicle sales decline, according to Bank of America Corp.'s annual "Cars Wars" forecast, "is a massive number and really harkens back to the idea that the crisis we're all sitting in the middle of is everywhere and anywhere, which is a lot different than what the industry has gone through in the past 20 or 30 years where it has been localized," said John Murphy, the bank's senior automotive analyst.
A growing consensus is taking shape that expects a years-long recovery for the U.S. auto industry and the economy. Bank of America predicts 12.8 million new vehicles will be sold this year, a 25% decline. It could take into the mid-2020s before sales return to more than 16 million, which still is less than the nearly 17.1 million vehicles sold in 2019.
But China, the epicenter of the virus, may be signaling some more positive news. Sales there in May rose 14.5% year-over-year, the second straight month of growth, according to the China Association of Automobile Manufacturers. In February, sales had dropped more than 80%. Its autos market is expected to recover in 2023, according to the forecast.
Meanwhile, major automakers have shared robust new-product plans, especially with the deployment of crossovers and electric vehicles. With fewer sales and investments into future technology, industry consultant Alix Partners LLP last week warned of a "profit desert" in the coming years.
New launches between model years 2021 and 2024 are expected to skyrocket to an average of 63 per year from an average of 40 for the previous two decades. The plans could create profitability risks, Murphy said. Many of the new vehicles are crossovers that have offered automakers high margins in recent years. By model-year 2024, there could be as many as 152 total nameplates of the "jacked-up station wagons."
"It'll be the most crowded segment in a couple of years," Murphy said. "You can't blame any companies for chasing it, but it still poses a risk for profitability."
Replacement rates have been strong indicators of market share in the past, Murphy noted. Detroit's three automakers in total lag the industry's; Honda Motor Co. Ltd. is the leader with a 91% replacement rate through model-year 2024. Ford Motor Co.'s 84% is higher than the 74% industry average as the company in recent years has renewed its focus on product cadence. That positions Ford for possible market-share growth.
Meanwhile, the figures indicate General Motors Co. and Fiat Chrysler Automobiles NV could give up some of their share. Coming off recent refreshes of the Jeep Wrangler SUV and Ram pickup, FCA's replacement rate is the lowest of major automakers at 57%. This highest-to-lowest disparity with Honda is twice the spread it has been in recent years.
GM's replacement rate is 65%, a percentage point under Volkswagen AG's. Both companies, however, are well-positioned in regards to investing in electric vehicles, Murphy said. The focus of the new powertrains on higher-priced vehicles that sell at lower volumes such as Cadillacs and the GMC Hummer truck reduce the company's replacement rate.
"The way the automakers for the most part, particularly GM," Murphy said, "are now recognizing how they have to develop the flywheel for EV demand. They're introducing luxury and niche products similar to what Tesla has been doing that are more luxury, high-priced products so they can make some kind of profit and small returns. ... It bodes well for some traction on these EVs."
This year, stay-at-home orders limited production and dealer sales. Low inventory levels, particularly on popular trucks, also may affect sales. With automakers hoping to ramp up production to normal by the end of June or in early July, inventory levels may return to normal by the fall, Murphy said. The next month will be critical for the companies and their supplies, said Kevin Nowlan, chief financial officer for Auburn Hills-based BorgWarner Inc.
"I think the challenge we're seeing is, there's a lot of volatility in production schedules from OEMs, and week-to-week they're changing," Nowlan said Thursday during Deutsche Bank's Global Auto Industry Conference. "Plants aren't necessarily running at the most efficient (levels). You might be running one shift, two shifts — it really depends on the demand."
Early challenges with supplier constraints are easing, especially as parts and vehicle production in Mexico has resumed, added David Dauch, CEO of Detroit-based American Axle & Manufacturing Holdings Inc.
"Probably the biggest uncertainty for all of us is just understanding where the consumer demand will settle in not only for the second half of the year but in 2021 and beyond," Dauch said. "We're prepared to adjust our operations accordingly — up or down."
Staff Writer Jordyn Grzelewski contributed.