- Period of unprecedented innovation in the sector
- Car manufacturers are among the largest investors in R&D worldwide
- Highly impacted by the COVID-19 crisis
- Increasingly restrictive anti-pollution standards requiring heavy investments
- High uncertainties on the global automotive supply chain notably due to the knock-on effects of the trade war
- Rising prices for car parts and equipment are affecting margins
The health crisis has strongly affected the global automotive sector. Supply has been reduced because of the consequences of the closure of several plants around the world in the first half of 2020. Meanwhile, demand has been impacted by consumers’ reduced 'appetite' for this type of durable goods, in a period of economic uncertainty linked to the consequences of the health crisis. Thus, car industry profitability stood at 0.8% at the end of the third quarter (Q3) of 2020 compared to 4.3% a year ago. As a result, vehicle registrations and production collapsed, before gradually picking up again, and significantly in Asia as from Q4 2020. Globally, car sales had contracted by 22% in October 2020 over 10 months. Vehicle production fell by 22% year-on-year at the end of October 2020.
Economic growth is expected to resume in 2021, following an unprecedented GDP contraction in 2020. Indeed, according to Coface, global GDP is expected to contract by 4.3% in 2020 and to rebound by 4.4% in 2021. However, even if sales in the sector start to recover, they are not expected to be able to offset the losses of the first half of 2020. A gradual recovery has been observed in China since Q2 2020, while Europe and the United States are still battling with the pandemic’s impact on sales and production, despite the slight improvements already noticeable at the end of the year.
Moreover, the sector is still undergoing a major transformation with the development of electric vehicles and increasingly restrictive regulations, which mainly concern CO2 emissions. The automotive industry is continuing to reconfigure itself with the rise of e-mobility and the emergence of new players in the electric vehicle and driverless car segments. Traditional carmakers and parts makers are continuing to forge new partnerships to face these new challenges.
Note for the reader: The “e-mobility” segment of the automotive sector includes fully electric vehicles, electric hybrids, and hydrogen vehicles.
Sector Economic Insights
Regarding the current situation, the automotive sector is suffering from both economic uncertainties and the crisis linked to COVID-19
Drastic total lockdown measures in most parts of the world led to the closure of factories and dealerships in the first half of the year and during Q4 in some countries in Europe, thereby causing the brutal shutdown of the sector. Indeed, because car production came to an abrupt halt, the number of produced vehicles collapsed. From a global perspective, since Q2 2020, a gradual and uneven recovery was observed. The easing of lockdowns enabled plants to reopen, which is supporting the recovery of demand. However, for the United States and Europe, the outlook for the automotive sector is more uncertain, since the health crisis linked to COVID-19 seems to have been poorly controlled since its inception.
In China, sales were down 42% in Q1 2020 compared with Q1 2019. Production plants here were able to gradually reopen in March 2020. Since then, monthly sales have surpassed 2019 levels and have been only 4.7% lower than last year’s records at the end of October 2020.
The number of registrations in Europe decreased by approximately 27% year-on-year at the end of October 2020. While registrations hardly recovered in Europe since lockdowns were eased, the rebound in infections during Q4 is exerting pressure due to higher restrictions: -27% in France for November, -3% in Germany and -27% in the UK.
In the United States, light vehicle sales decreased by 17% year-on-year at the end of October 2020. This is, in fact, less significant than in Europe due to less drastic lockdown measures. However, due to fewer selling days, November light vehicles sales fell by 14.3% according to J.D. Power estimates. After adjusting for this factor, the decrease is estimated to be at around 3.4%.
Furthermore, the automotive sector remains in a state of transformation. Indeed, the institutional environment is pushing carmakers and equipment manufacturers to develop electric engines. Before the COVID-19 crisis, new regulations and standards on polluting vehicles had been initiated. Some car manufacturers have asked for an easing of these regulations, which came into force in 2020 in Europe, because of the health context. With respect to the European institutions, pushing back these new rules to 2021 does not seem possible given the environmental emergency. Consequently, the hybrid and electric segments of the automotive sector are those most likely to recover quickly, since they benefit from public support, particularly in Europe, China and the United States.
The pace of recovery in the sector differs from one region to another but remains difficult in all markets
Regarding Asia, the recovery is in progress but remains fragile, except for China (7% economic growth forecasted by Coface for 2021 vs. 1% in 2020). Indeed, in China, the fear of taking public transport due to the pandemic may have had an impact on the willingness of households to equip themselves with a car. In order to revive the sector, public authorities have implemented various incentives. For instance, at the local level, 10 cities are providing a subsidy for new energy vehicles sold between March and December 2020. At the national level, the government has extended its financial aid plan for the purchase of electric cars until 2022. In the Eurozone, a rebound in activity is expected in 2021, with economic growth anticipated at 5.3% by Coface, after -8.3% in 2020. However, the sector is gradually recovering, a little later than in Asia due to lockdown measures that have been extended to the winter of 2020. The region is witnessing an uptake in alternative engines vehicles sales due to authorities’ subsidies and more stringent environmental protection rules. However, while this phenomenon is gaining momentum, lack of infrastructure will weigh on future sales. On the American continent, infection levels remain very high because of poor crisis management at the time of writing. However, light vehicle sales have remained relatively resilient and have not collapsed as they have in Europe, for instance. Dealerships continue to sell cars at discounted prices, with price deductions averaging up to USD 4,000 per vehicle.
From a structural point of view, the automotive sector is undergoing major changes at a global level. These are mainly linked to a transition towards the decline of thermal engines in favor of electric ones. Coface expects this reconfiguration of the sector to continue in the medium- and long-term.
The rise of e-mobility is mainly linked to new players such as Tesla, a manufacturer of electric vehicles, joining the world leaders. Faced with this trend, the entire automotive sector is investing heavily in Research & Development and is expanding its electric vehicle ranges in order to compete with these new players. The COVID-19 crisis is expected to contribute in accelerating the reconfiguration of the sector. Indeed, e-commerce and the overall digitalisation of the economy have strongly developed during the health crisis, which has led to the emergence of new modes of consumption. A reorganisation of distribution channels has been noticed in the automotive sector. For example, Tesla implemented its sales strategy by closing physical points of sale in order to focus on online sales. This has a dual objective: to adapt to consumer expectations and to save money in order to maintain financial stability in the context of the economic crisis linked to COVID-19. This situation could be an incentive for traditional manufacturers to establish partnerships, with the objective of lowering costs. This is, for instance, the case of Ford and Volkswagen, who will jointly produce 8 million commercial vehicles. Partnerships between vehicle manufacturers and technology service companies are also emerging, like Google and Renault, who are teaming up to improve Renault’s industrial processes.
Automotive sector players must adapt to increasing regulations against pollution and global warming, which are becoming more restrictive
These measures are forcing manufacturers to make heavy investments to comply with standards. In Europe, the new CO2 standard in force since January 2020 aims to limit the number of polluting vehicles sold. Non-compliant carmakers will be fined if their fleet of vehicles for sale emits more than a predefined threshold of CO2. Although there is a natural tendency to converge on the adoption of anti-pollution standards in the main automobile markets, the question of the homogeneity of standards between the main markets still has to be monitored, considering the risk of segmentation. In the United States, the legal divide between the State of California and the U.S. federal government on the Clean Air Act is a good illustration of this risk of fragmentation. Since the Obama presidency, California has had a waiver to set its own anti-pollution standards. The Trump administration revoked the waiver, but California, supported by 13 other States, decided to challenge that revocation in court. This legal battle offers little visibility to carmakers and automotive suppliers, particularly in terms of investment decisions.
Last update : February 2021