Several automakers and suppliers have scrapped their 2020 financial outlooks and are holding back any new forecasts because of uncertainties caused by the coronavirus outbreak. BMW Group is a notable exception. The German automaker predicts significant decreases for vehicle sales and overall revenue, and it expects its operating margin to fall by 4 percentage points to a range of 2 percent to 4 percent.
How bad are things in Europe? Well, Mario Draghi, the usually soft-spoken former president of the European Central Bank, called the crisis "a human tragedy of potentially biblical proportions."
Global auto sales will plummet 12 percent to 78.8 million, IHS Markit forecasts. This represents a downgrade of 10 million units compared with the firm's pre-crisis forecast in January. Such a decline would be considerably worse than the two-year peak-to-trough decrease of 8 percent during the Global Recession in 2008-09, IHS warned.
Light vehicle sales in Western and Central Europe are expected to decline 14 percent to 15.6 million units this year; U.S. sales will fall 15 percent to 14.4 million, and demand in mainland China will slump by 10 percent to 22.4 million this year, IHS predicts.
Rather than settling on one set of numbers, consulting firm AlixPartners has formulated three potential scenarios.
1) After two to three months of disruption there will be a quick recovery. As a result, sales in China will decline between 7 percent and 10 percent; while Europe and the U.S. will drop 10 percent to 15 percent. The global sales decline will be 9 percent to 13 percent. This scenario estimates that vehicle plants will restart after three to four weeks of lockdown, which looks unlikely under the latest developments.
2) Global vehicle sales decline by 16 percent this year. Plants remain closed for two to three months. Customers hold back on car purchases for two to three months. There is no noticeable recovery in the second half. As a result, car sales in China fall 8 percent to 12 percent and decrease by a minimum of 20 percent in Europe and the U.S. Under this scenario, China, Europe and the U.S. are forced to take action to boost the economy; the industry faces a cash crunch, increasing the risk that bailouts will be needed to rescue companies.
3) The third scenario is more in line with Draghi's fears. A global recession takes hold in 2020 and 2021 and worldwide vehicle sales drop 22 percent, led by 25 percent declines in Europe and the U.S. and a 15 percent decrease for China sales. In this scenario, cash-strapped consumers postpone car purchases, causing some automakers and suppliers to collapse as they did in 2008-09.
With most of Europe still under lockdown, it is difficult to judge which of the three scenarios is most credible. What we know is that the automotive industry is much better prepared this time than it was in 2008-09.
As a result of the hard lessons learned during the Great Recession, automakers and suppliers have more cash in their coffers. They have also become a lot better at cash management. They have achieved both despite pressure from financial analysts to decrease what those experts felt were piles. Automakers refused to distribute that so-called "excessive" cash to shareholders.
Today they look pretty smart, because if cash was king in the post-2008 era, it is a true emperor in these even more uncertain times.
