Second wave of Covid-19 may delay industrial recovery

Fitch Solutions expects global vehicle production, which affects rolled metal demand, to decline 11.5% year-on-year in 2020 as a result of Covid-19 lockdown measures and supply chain disruptions.

The current crisis has hit the industry harder than the 2008/09 global financial crisis. “Even in the midst of the global financial crisis, the industry was still able to function, so companies could still manufacture and dealers could still sell,” said Anne-Marie Baysden, head of automotive research at Fitch Solutions. “What we expect now is … in fact more than a doubling of the recession during the global financial crisis.”

A second wave of Covid-19 could push the auto sector’s recovery towards 2022 instead of the moderate recovery currently projected for 2021.

Automakers have taken on a huge loan to invest heavily in electrification and autonomous vehicles in recent years. These are things that have not yet provided a return on investment, and now their returns have weakened further. This will mean a challenging operating environment for these companies in 2020-21.

Electric vehicles (EVs), however, will benefit from the pollution problems associated with Covid-19, a respiratory illness. Consumers are believed to be becoming more cautious about climate change and their carbon footprint following Covid-19. Fitch Solutions says governments will encourage the use of electric vehicles as they have zero exhaust emissions and help reduce CO2 and NO2 emissions.

EVs will be at the center of a production restart for at least four reasons. They are more automated and less labor intensive; smaller scale, cheaper in nominal terms, and more commercially viable for automakers with complex operating costs. Moreover, the ramp-up in electric vehicle production is in line with the demand to reduce emissions from the average fleet in Europe. Finally, they usually require fewer parts and tighter supply chains during times of increased supply chain risk.

As a result of this pandemic, “… automakers will increasingly seek to diversify their supply chains outside of China,” said Joshua Cobb, chief analyst for the automotive industry at Fitch Solutions. There will be no mass exodus, but automakers will scale back their capacity in China and move closer to their core markets.

However, “… there is no other country that can come close to China when it comes to manufacturing capacity,” Cobb noted. India is approaching in terms of labor costs, but still needs significant development to absorb this potential from China.

Morocco, where French carmakers have established manufacturing facilities, could benefit from carmakers leaving China or Algeria, where operational risks are rising. Chinese carmakers could benefit from the exit of carmakers from Southeast Asia.

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