2020 was always going to be a significant year for the automotive industry, but a global pandemic has sent its significance off the charts. After the sector ground to a halt this year, the industry will want to focus on accelerating its recovery—but it can’t before it assesses the damage done.
By the end of the year, we predict that the global automotive market will have suffered a 14% slump in new car registrations. This contraction is slightly lower than the 20% we predicted for the sector at the height of the first round of national lockdowns earlier in the year, but the story isn’t the same everywhere. For example, in the UK, sales of new cars are expected to continue declining all the way through to the end of the year, with the market set to post a contraction of 31%. The US, the second biggest market in the world in terms of new registrations, will see sales drop by 15%. This larger-than-average drop in sales has the potential to continue into the start of next year with uncertainty around employment and the economy encouraging consumers to hold onto their savings for the time being. The spectre of Brexit also hangs over the UK and its major European manufacturing counterparts. For example, German car manufacturers are expected to be hit with a €2.8bn (US$3.4bn) hole in their order books should the UK and EU negotiators fail to agree a trade deal.
In contrast to the West, the automotive picture for China is a lot brighter. The largest automotive market in the world—representing 28% of all sales in 2019—demonstrated a strong continued recovery from as early as April, and sales should only taper off by 2% this year. Given that China had to impose heavy restrictions far earlier than the rest of the world, its economy fortuitously emerged ready to recover, just as the virus was sinking its teeth into the rest of the global economy.
If major businesses are to avoid the incoming wave insolvencies, they will need to face the industry’s issues head-on
China’s path to recovery has also been buoyed by its growing demand for cars, as the virus has enforced many to abandon public transport and other shared forms of transport. In 2021, this is only set to continue: sales will grow by 12% with 28 million units sold. In terms of a recovery for Europe and the US, the trajectory is likely to be far more subdued. While both should show partial recoveries, they’re likely to be far more drawn out than we had hoped for earlier on this year and a return to pre-crisis levels won’t happen before 2023.
Any sort of recovery is good news for the sector, but the longer it is delayed and more subdued, the longer businesses are at higher risk of failing. Already in Q3 of 2020, the automotive sector registered 25 major insolvencies—businesses with a turnover above €50m—marking a dramatic increase from the nine witnessed in the same period in 2019.
As sales begin to pick up again, car dealers, be they retailers or wholesalers, are by no means in the clear, especially the independent and smaller ones. The exposure to the current price pressure and financial strains is also going to affect suppliers, car rentals and, crucially, non-electric vehicle (EV) players.
Necessity is the mother of invention
If major businesses are to avoid the incoming wave insolvencies, they will need to face the industry’s issues head-on. Over the course of the last 12 months, the picture has shifted for the market and brought the most critical challenges to the fore. Specifically, the structure of the market and the future of EVs, both of which are exerting a tremendous amount of financial pressure on firms. Addressing these will be essential to driving a recovery.
With market maturity hampering recoveries in the US and the UK, expect the structure of the industry to change and become more competitive. Demand is decreasing in markets which typically used to dominate across the world—especially in Europe, which represented four million units of the 8.1 million unit loss across the top four markets—while smaller economies are showing an uptick in demand. This competition will lead to something of a price war, but also an incentive to innovate.
Due to the high cost of the technology needed, such as batteries, EVs are a tough proposition for major firms as they yield low margins and are so far tricky to make profitable. However, the decision is largely out of their hands because of the targets—and the risk of steep fines for not meeting them—countries and blocs are now putting in place. For example, the UK recently set out its plan to ban the sale of new gasoline and diesel cars by 2030, ten years earlier than previously planned. Fortunately, it’s encouraging to see that EV adoption is already well underway, with around 1 million new EV sales in Western Europe expected for 2020. It’s just a question of if everyone will keep up.
If firms fail to accelerate a green recovery, not only will they suffer damaging financial sanctions, but face a real risk of being left behind. From manufacturers to suppliers, the whole automotive industry must be agile and able to react quickly. Their future depends on it. The industry hit a red light in 2020, and it’s only turning to amber next year as it slowly forms a recovery. If it wants to generate sustainable growth in the future, green is the only way to go.
Maxime Lemerle is head of sector and insolvency research at leading trade credit insurer Euler Hermes