Covid-19 Could Have a Lasting Impact on the Automotive Industry

Even in the early days of the coronavirus outbreak, as the spread of COVID-19 forced factories across China to close, it seemed clear that the virus would have a noticeable impact on the automotive industry.

Now, months into the outbreak, we have a clearer picture of how the COVID-19 crisis will affect production capacity, demand and the labour market. Analysts believe the pandemic is likely to have larger and more lasting effects on the automotive industry than predicted. 

This is the impact COVID-19 is likely to have — and what manufacturers can do over the next few months to weather the crisis and prepare for a new normal.

COVID-19's Impact on Vehicle Demand and Industrial Capacity

In the UK, automotive demand was down a staggering 95% in April. About 95% of manufacturing capacity in Europe — and more than 90% in America — currently sit idle as concerns about worker health prompt manufacturers to temporarily close factories. 

Facilities that have reopened are doing so with strict measures designed to protect worker safety — PPE like gloves and masks, 6 feet of distance between people and limited numbers of employees on the factory floor — that will slow production of new vehicles.

The disruption has been felt by both auto manufacturers and OEMs that produce parts and materials necessary for the manufacture of new vehicles.

At the same time, dealerships have seen massive drop-offs in demand and plummeting sales as retail traffic has slowed to a near stop. In some areas, dealers have been allowed to keep their stores open, but in others, they've been asked to shut down temporarily. These places are turning to alternatives, like digital showings, limited hours and social distancing policies. 

When Will Demand Return to Normal?

The current demand drop is unprecedented. While consumer vehicle sales fell noticeably during the global financial crisis of 2008, the market slowed but did not drop nearly as significantly as it has in the past few months. Analysts following the American automotive industry have adjusted their predictions for national sales in 2020 from 17 million to 13 million, down 20% from last year. Global and UK numbers are expected to look similar.

Experts aren't confident when demand will return to normal. Consumers will likely only be willing to make significant investments once they are facing less uncertainty. Many people right now aren't sure how secure their employment is or how long they should expect the virus to last. It's likely that consumer confidence and demand for new vehicles won't begin to recover until the end of the crisis is in sight. 

A vaccine is a long way off, even with modern medical technology and global commitment of resources accelerating development. Before a vaccine is available, shelter-in-place orders and social distancing will be required to slow the spread of disease. In countries that have begun to reopen their economies, fears of a second wave have pushed governments to reinstate closures and other public health measures.  

Manufacturers will probably be handling this crisis through the end of the year at least, and possibly well into 2021.

COVID-19 may also shift consumer demand for cars permanently. There is some evidence that new habits — like avoiding public transportation in favour of private vehicles — may continue, even after the crisis is over. An Ipsos study conducted in China found that non-car owners were much more likely to be using private vehicles — or were considering purchasing one of their own — following the height of the coronavirus outbreak there. 

How Manufacturers Can Respond

The crisis will have significant impacts on all manufacturers, but some may be more hard-hit than others. Laurie Harbor, CEO and president of American manufacturing consultant Harbour Results, said businesses in "an already weakened state" were likely to emerge worse off. She also said, "not every manufacturer is going to come out of this crisis intact."

However, while the current market conditions aren't ideal, manufacturers have room for strong responses that can help them handle the situation. Identifying supply chain vulnerabilities and reliable sources for materials can help manufacturers stay resilient. Some suppliers are winding down production or managing new logistics difficulties.

Several manufacturers are offering financing options, payment plans and job loss protection programs designed to help customers afford new cars. Dealers and automakers are also providing special shopping options — like touchless pick-up for new vehicles, online browsing and at-home vehicle delivery — for customers who are worried about their health and are avoiding crowded areas.

Many manufacturers are also simply redirecting some of their industrial capacity where it's needed. Automakers in the UK, for example, are retooling factories to produce medical equipment, like ventilators, masks and gloves for the NHS. It's struggled to source the PPE and health care devices needed to protect doctors and nurses who treat COVID-19 patients. Several manufacturers in America and Europe have taken similar approaches.

The Lasting Impacts of COVID-19 on the Automotive Industry

No matter what strategy a manufacturer takes, however, they should prepare for a long period of decreased demand and general market instability. All manufacturers should plan for a slow restarting of the global supply chain. The automotive industry will restart production at the same time as OEMs, meaning there could be significant strain on the auto parts supply chain. 

Because automotive is such a massive industry — accounting for an estimated $5.5 trillion of the global economy — the impacts it feels will likely have a ripple effect.  Fortunately, experts predict that once the recovery begins, the demand may return quickly. The Bank of England has warned that the UK is set to enter its "deepest recession in 300 years" but also predicted a V-shaped recovery, meaning that the economy is likely to bounce back as fast as it declined.

Again, when that recovery will begin still isn't clear. Demand may not start rising until consumers feel confident in making large purchases. This may not be until after a vaccine for the novel coronavirus has been developed — a process that could go on for months.

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