Peter G. Hall Vice-President and Chief EconomistExport Development Canada
Things were looking good for the global automotive sector entering 2020
Things were looking good for the global automotive sector entering 2020. Annual vehicle demand in the United States—Canada’s main export destination—was just shy of the recent cyclical peak and stabilizing around a healthy plateau. The productive capacity of original equipment manufacturers (OEM) with operations in North America had also been gearing up, fuelled by significant investments within a highly competitive technology race to satisfy the significant wave of vehicle replacement needs. How has COVID-19 changed things?
Deep and sophisticated supply chains are a hallmark of auto sector efficiency, but instantly became the sector’s Achilles heel when the COVID-19 outbreak hit. The automotive sector is now considered to be among the most vulnerable to the impacts of the global pandemic. According to S&P Global Ratings, the automotive sector exhibits the highest rating downgrade pressure. In Canada, the auto sector has one of the highest rates of reliance on imports of intermediate goods among all sectors. Normally, vehicle suppliers keep at least two months of parts inventory sourced from Asia and it usually takes between 30 to 60 days to receive new shipments from China to North America. This means supply chain disruptions in Asia can have significant business implications.
As the virus epicentre rotated—first from China to Europe and then to the U.S.—national lockdowns and stay-at-home orders temporarily shuttered factories and largely kept vehicle buyers away from dealership showrooms. China’s 80% drop in vehicle sales rocked the world. And prior to implementing their own temporary shutdowns, globalized OEMs and myriad suppliers faced the daunting prospect of China-sourced parts shortages.
In Europe, nearly all automotive production plants shut down operations in March and production data followed the China pattern. April is expected to show an even larger hit. The European Automobile Manufacturers Association estimates region-wide vehicle production losses are tracking at around 2.2 million units, equal to about 10% of total production in 2019.
In North America, the shutdown hit vehicle assembly plants in mid-March as employee health became a key concern. OEMs in Canada and Mexico largely followed suit. Return-to-work plans are expected to be gradual and staggered across jurisdictions given heightened concerns over employee safety, the expectation of lower demand and potential supply chain disruptions. Most U.S. and Canadian OEMs are currently targeting early-mid May to restart assembly operations, while Mexico appears to be delaying into June. Global industry analysis by IHS Markit estimates this timeline would mean a loss of 2.8 million units, equivalent to around 17% of total 2019 production.
On the demand side, annualized new vehicle sales in the U.S. fell to 11.3 million units (-34% month over month) in March, and to just 8.6 million units in April (an additional 24% drop), the lowest level in on record since 1980, reflecting the impact of a full-month lockdown. In all, compared to the last global crisis, the peak-to-trough sales decline is expected to be sharper and swifter this time around. Key sector forecasts currently project U.S. sales in 2020 between 12.5 and 12.9 million units, for a decline of roughly 25% compared to 2019, assuming demand rebounds in the second half of 2020.
Canada’s auto assembly sector is in a downtrend. In recent years, new production capacity expansions for light vehicle assembly have largely benefitted the southern U.S. and Mexico. GM’s recent exit from its Oshawa assembly operations underscores Canada’s declining share of the North American light vehicle manufacturing pie, down from 17% in 2010 to 11% now. Moreover, Canada underperformed in vehicle production in North America for March, which year-on-year tumbled 28% in the U.S., 25% in Mexico and 34% in Canada.
The bottom line?
COVID-19 hit the auto sector in a season of strength, but its effects have been devastating. The outlook for the industry will depend critically on how quickly and completely sales recover. Once things settle down, the industry’s future will then shift to investment considerations. There has already been talk about regional consolidation as a means of securing supply chains. Sales may suffer greatly if a permanent move to more virtual commerce decimates commuting and increases the use of home delivery. Don’t count out significant industry consolidation. At the same time, don’t forget this industry’s capacity for creativity and innovation. The speed with which sector production shifted to PPE and ventilator devices is testament to its perceptiveness, adaptability and ingenuity—qualities that suggest that Canada’s players are definitely in the game for the long run.