Original equipment manufacturers (OEMs) could feel the negative impact of COVID-19 related automotive shutdowns in three major areas in 2020, according to an ING report.
Lower car parts demand
In China, which was the first country to close due to COVID-19, light vehicle sales decreased by 18.6pc in the first two months of 2020 with sales falling 79.1pc by March. However, sales in the country improved in April after China reopened crossing two million vehicles, the report indicated.
In Europe, the light vehicle market contracted by 44pc in March amid lockdown measures while new vehicle sales that included cars and light trucks in the US fell by 47.9pc in April. Add to this, high unemployment in the EU and the US during this period has also impacted car sales, an effect that is likely to remain through the rest of 2020, the report stated.
Lower new car sales and manufacturing will affect OEM volumes, the report indicated, even though demand for car parts for repairs is likely to recover during the year. Lower volumes for spare parts for new cars will be led by lower demand for new cars as consumers look to save up in an uncertain economic environment, leading to a drop in sales, and therefore production of light vehicles.
Pressure on liquidity
These lower sales volumes have also impacted OEMs, adding pressure on their liquidity as revenues, earnings and cash flows decrease and debt increases, the report stated.
Changing supply chain patterns
The third effect could be a change in supply patterns. Giving an example, ING indicated that the virus outbreak in China’s Hubei province—home to OEM factories for some of the world’s biggest carmakers—had impacted global automotive supply chains long before COVID-19 became a pandemic.
Moreover, OEMs are generally clustered around car making plants with most of the production of a vehicle from component parts (value add) happening in those hubs. This makes incentivizing and de-risking all components made by OEMs a complex process especially since a vehicle’s value add could involve components provide by more than 10,000 suppliers, according to ING.
The report suggested that OEMs could look at increasing their resilience by holding larger inventories closer to the car making hub that could help vehicle production even amid supply chain disruptions, though that would involve higher storage as well as working capital expenses for OEMs looking towards self-sufficiency that involves more domestic production and lower imports.