SUVs- A New Ray Of Hope for Automotive to Maintain Social Distancing and Industry Growth!

  • Published | 28 July 2020

SUV CarsThe global market for Automotive is going through its most significant transition ever. Automakers constantly develop various new techniques or modes of driving vehicles autonomously and electrically, and adjust their business models and product portfolios accordingly. The 2019's crushing demand backdrop in key regions displaying declining volumes and compressed margins, compelled automakers to respond defensively for the first time after the global financial crisis of 2008-09. Car sales in the European Union took almost a decade to rebound from the global recession commenced in 2008, while the same took only five years in the US economy. However, car sales in the US have registered a decline in earnings since 2015. In China, initially, the exponential growth in automotive sales helped compensate the effect of recession, but since 2018 it has witnessed a downward trend.

The automotive industry has been growing in the last few years. New developments have found their way, and new market avenues have opened up due to disruptive technologies. Business models and markets are subject to rapid growth, disruption, and change, given the fast, accelerated developments taking place daily. A variety of factors can be examined to assess trends in the global automotive market.

Automotive Market Trends

  • Changes in Manufacturing

The world's largest automotive producers continue to invest in production facilities in developing markets to reduce the manufacturing costs. These emerging markets include Southeast Asia, Latin America, China, Malaysia, and others. US automakers, "The Big Three (GM, Ford, and Chrysler)”, have joined hands with other European and Japanese car manufacturers and have formed strategic commercial alliances. Most car manufacturers are sure of their shift to emerging mobility options. And in such a scenario, strategic collaborations and alliances ensure their leap forward while retaining a competitive edge in these troubled times.

  • Changes In Customer Demand:

Many customers are inclined towards greener, more fuel-efficient and more sustainable vehicles.

  • Changes in Brand Loyalty:

Brand loyal consumers are now rethinking their buying decisions as a result of the excess market choices. Customer experience is fiercer than ever.

  • Changes in Mobility:

By default, mobility no longer means auto-mobility; the only thing that matters is reliable and affordable transportation.

  • Technological Advances:

With the digitization of cars, the global automotive industry has undergone a significant transition over the last two decades.

COVID-Impact across Industry

In 2020, the global automotive industry has been experiencing unprecedented turmoil, due to COVID-19 and the economic recession caused due to the lockdown in the markets. The auto companies in South America and India are witnessing various problems but the rest US and the European automotive market are likely to offer rewards in place. However, the overall revenues have remained stagnant so far. As China controls the production of original equipment, all Japanese, American, and European OEMs (original equipment manufacturers) will struggle to sustain their operations. Chinese manufacturers are expected to reap some benefits of by being ahead in completing their electrification plans. Ten Chinese cities have launched incentive programs to stimulate the automotive market. For example, Guangzhou has declared a subsidy of 10,000 RMB (renminbi) for new energy vehicles sold between months of March to December end.

Factory closures and labor strife

Worldwide, automakers had at least 20% more manufacturing capacity than they needed before the outbreak of the coronavirus. The idle capacity and space were costing them money without generating any income. As the sales further plunged, it became a matter of survival, leading to the shutdown of underused plants. Some of the big plants in Europe are expected to struggle, especially the ones manufacturing smaller cars, like Fiat, Renault, or Volkswagen's SEAT brand, which might not withstand the requirement of profitability.

Before the coronavirus slacked plants, closed dealerships, and sent profits into a free fall, the automotive industry sustained a harsh year. Things are expected to go in a Darwinian way that will realign the market causing a dramatic impact on the eight million automotive industry employees worldwide.

Electric cars could come sooner.

Though gasoline and diesel-powered vehicles sales were affected by the lockdown to a great extent, sales of electric cars were remarkably resilient. When the major part of Europe was under lockdown in March 2020, the continent's car sales fell by more than half by volume. In the coming months, carmakers could not be as eager as they were in pre-COVID times, to market electric cars. Instead, they would be tempted to promote SUVs which are likely to generate more income and more convenient to sell now, given the plunge in fuel prices.

Personal mobility is the key element during COVID-19 crisis to ensure personal safety. Mobility solutions, including electric and autonomous vehicles, demand investment worth billions of dollars. The need for collaborations and alliances has become more critical and urgent due to the current financial crunch experienced by the automakers.

Below are some recent developments and steps that global automakers have taken to ensure liquidity to maintain their daily operations:

  • Recently, Daimler secured US$ 13 billion in bank credit lines.
  • Ford secured US$ 15 billion from existing lines of credit and US$ 8 billion from unsecured bonds.
  • Regarding plant shutdowns, Volkswagen reported a loss of US$ 2.2 billion per week.
  • The French Government will bail out PSA and Renault for US$ 8 billion (EUR7 billion).

COVID-Impact on Related Industry

The prolonged lockdown has also put considerable strain on other automotive ecosystem players (providers of mobility solutions, used car companies, and after-market service providers) whose financing is heavily dependent on ambitious revenue growth estimates of automobiles. Public mobility players need to reconsider their offerings, as consumers will end up preferring, at least in the short term, private transport modes that guarantee 'social distance.' With the automotive industry, COVID will also affect raw material and associated industries such as petrol, diesel, lubricant, steel, spare parts, etc. significantly.

COVID-Impact across Regions

China: Based on recent figures released by the China Passenger Car Association (CPCA), China’s sales fell sharply in June 2020, following positive recovery patterns seen during May and April. New-energy vehicle sales (NEVs), including electric cars, are also on the decline. After increasing steadily for several years, electric vehicle sales have lost momentum due to the government's rolling back of incentives in mid-2019 and lower oil prices, making conventional internal combustion engine (ICE)-powered vehicles more cost-effective.

United States: In June, COVID-19 cases registered a spike in some crucial states of the US, including California, Texas, and Florida, triggering fresh curbs on citizens' movement that led to some potent headwinds for PV sales in the region. With more social constraints and lockdowns likely to be imposed in the coming weeks, recovery prospects for the US remain fragile. On a positive note, Tesla's market capitalization now exceeds Toyota's, making it the world's most valuable carmaker, highlighting its sustained global sales momentum during even the pandemic era.

Europe: Market in Europe is experiencing some correction in automotive prices as the automotive sale is backed by a combination of pent-up demand and various government subsidy programs that allow drivers to exchange older vehicles for new ones.

Rest of World: South Korea remains a bright spot in Asia, with domestic production and sales booming to 176,468 units by more than 41% in June compared to previous month. In India, while leading automakers such as Maruti Suzuki, Hyundai and Mahindra are ramping up production and showing incremental month-to-month wholesale shipments, sales remaining a length away pre-COVID-19 rates. On the other hand, tractor and two-wheeler sales saw a strong recovery in June, driven primarily by increased rural demand and a resumption of goods movement following a gradual easing of lockdowns across the country.

To summarize the present status of automotive sector, the opinion of Daimler’s chief executive, Ola Källenius, can be quoted… “Currently, the automobile industry cannot have completely positive projections, and expect that everything will return to normal in 2021 as if nothing happened. COVID is likely to have a significant effect on the automotive sector and economy too.”