Ugly demand, meet ugly supply

As a young newspaper reporter, I would sometimes find myself assigned to write a story about rising or falling gasoline prices.

Such a story could be entertaining if someone said something clever. But usually it would boil down to an expert saying it was all about supply and demand. Frustratingly predictable, but such is the first rough draft of history.

In the end, economic stories are always about supply and demand — what causes one to change or what happens because one of them changed.

But the petroleum industry, as fascinating as it can be, is a lot more straightforward — almost linear — compared with automobiles. A global web of business relations is manifested in thousands of pieces of metal and plastic and silicon that can be fitted together to make devices that embody the ideals of personal freedom as well as the power to travel at superhuman speeds while carrying your loved ones and hundreds of pounds of stuff.

Make no mistake about it — this is a deep contraction, on both the supply and demand sides of the equation.

I am relieved that sales didn't fall quite as dramatically as they did in China or Italy — or in line with the 96 percent drop in light-vehicle production in North America last month.

I am encouraged that more dealers are opening up safely and especially that more are mastering the art and science of online sales and remote delivery.

I'm glad to see the market on an upward trajectory. But it is going to be a long, hard road until there's a widely used, safe and effective vaccine or natural immunity.

The markets and executives might all cheer if May sales fall by only 30 percent. It would, in fact, be better than our worst fears. But that doesn't mean the rest of the year is going to be swell.

Collapsing fleet demand alone would put the industry on a recession footing.

Fleet sales are usually about 15 to 20 percent of the market, and those are going to be down by at least half. Rental-car companies alone made up more than 9 percent of the market last year, and they have pretty much declared themselves out of the car-buying business for the rest of 2020. State and local governments are cash-squeezed and likely to defer vehicle purchases as much as possible.

The third category of fleet sales — to commercial customers — may provide a bit of a lift, said Jeff Schuster, LMC Automotive president of global forecasting. Landscaping businesses might get as busy as delivery drivers are, but a lot of companies have depressed outlooks.

At retail, one can focus on the fact that the coronavirus has done less economic harm to people who can afford a $40,000 vehicle, but at least some significant percentage of those folks are also anxious about their future cash flow. How many: 10 percent, 20 percent?

Put them together and demand may be down by 25 percent. If that holds for the year, it would be the biggest drop since World War II, when auto production and sales effectively stopped.

Schuster said LMC has raised its estimate a little after April and most of May came in above expectations, and he's anticipating some stimulus from Washington, though probably not much. LMC's estimate of a 22 percent drop would also be historic.

So the demand picture is ugly.

But there are supply risks, too. In the next week or two, it should become clear whether factories can operate consistently without sparking a second wave of widespread infections. So far, there have been only brief stoppages to clean work areas after people were found to be sick. Here's hoping that's all we see.

But there also have been production stoppages because of a lack of parts.

As Mexico continues to struggle to contain the virus, the flow of vehicles and much-needed parts from that important trading partner will be lacking.

U.S.-based suppliers, too, are grappling with working-capital needs while they also spend to accommodate social distancing like other manufacturers.

"If something goes wrong in just one of those pieces … everything slows," Schuster said.

With limited parts supply, Schuster suspects "we're not going to see anywhere near pre-COVID levels of production for a while."

Maybe by the fourth quarter, he said, production could get back to full monthly (if not hourly) output, but he acknowledges "that may be optimistic."

Inventory is already running low on popular vehicles in areas where massive discounts got ahead of local limits on commercial behavior. If production doesn't rise to meet at least the limited demand that exists, there's little else that can be done — no incentive can inspire consumers to buy trucks that haven't been made.

Challenges abound whether one looks at supply, demand or the intersection of the two. But companies large and small in this industry come up with amazing solutions to tremendous problems every day. I can't wait to see how they work through this mess.