The spread of Coronavirus and turmoil in the stock markets is further putting pressure on the automotive industry.
Here at Datium Insights we look into some of the likely ramifications on car sales for the near future.
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With cases rising here in Australia and around the world, the impact of the COVID-19 pandemic is increasingly looking to have long lasting effects on society.
Already we’ve seen extraordinary quarantine measures put in place in China of the sort the world has never seen.
In Italy, South Korea and Iran similar social distancing measures are being introduced. Schools, concerts and sports events are being cancelled in affected countries across the globe.
As these containment policies gain momentum, they have begun to spur far reaching and sometimes unexpected behaviours in business and finance, including wide scale falls in stock markets not seen since the Global Financial Crisis.
Images and video of empty supermarket shelves in quarantined Chinese cities have been circulated widely in mainstream media.
As the pandemic continues to spread, people have understandably expected similar scenarios developing in their own communities and begun stockpiling in advance.
This expectation of quarantine and containment has brought the Australian economy, as well as others around the world, to the brink of recession.
While supermarkets and pharmacies temporarily experience swift trade, most businesses are experiencing significant stresses from slowing sales and disruptions to supply lines.
The car market is no exception.
Global Car Slowdown
Recently, China’s Passenger Car Association (CPCA) noted that car sales had dropped 92% in the first two weeks for February.
This is in addition to expectations of a decline in car sales for a third straight year in China.
Looking at the US, the second largest car market has seen car sales drop from a high of 17.4 million in 2016 to 16.9 million in 2019.
Similarly, in Australia, car sales have decreased 11% since their high in 2017.
While the broader global trends driving this decline is largely due to changes in emissions regulations, this has now been compounded by the impact of the Covid-19 pandemic.
The automotive industry experienced significant damage during the last Global Financial Crisis, from which a number of manufacturers have not been able to recover from.
Assessing, understanding and taking lessons from the last GFC will be crucial to understanding how to navigate the next 12 months.
What happened to car sales during the GFC?
In late 2007, the sub-prime lending crisis in the US manifested itself into a global financial contagion.
This contagion affected the flow of credit around the world – the major driver of investment and spending.
Central banks scrambled to reduce interest rates in response, aiming to induce spending and investment in the economy.
The staggering loss of jobs and wealth however constrained consumer spending for years following the crisis, with interest rates continuing a decline till 2012.
With cars being the second largest household expenditure, consumers and businesses naturally refrained from making purchases.
In the US and UK car sales saw a year-on-year 40% drop by the beginning of 2009, while Australia experienced a 23% drop.
This initial drop was then followed by 24 months of extreme volatility in car sales. It wasn’t until 2013 that sales across the world began to stabilise.
In the manufacturing space, some of the largest brands saw historic losses.
Toyota experienced its first loss in 70 years in it’s key vehicle manufacturing business.
The “Detroit Big Three” – Ford, General Motors and Chrysler – faced near bankruptcy with GM and Chrysler requiring bailouts from the US government to survive.
Global car production reduced dramatically in 2009 as car brands reduced supply to counter to falling demand in the market.
Alongside reductions in car production, job losses mounted across the industry. The United States Department of Labor showed a reduction of roughly 400,000 jobs for people employed in US motor vehicle and parts manufacturing businesses.
While the trigger for the last financial crisis was a housing bubble in the US, a potential global pandemic creates a host of different outcomes if another financial crisis were to follow.
The Used Car Market
The volatility experienced in new car markets also had flow on effects on the used car market.
Cutbacks in consumer spending saw demand fall while business fleets decided to extend their leases to forego new capital expenditure.
Used car prices saw a near 15% decline in Australia for some segments – as seen below in the Datium Insights Used Car Price Index.
Compared to new car sales however, used car prices saw a lower level of volatility following the GFC.
Consumers, wary of spending, decided to forego a more expensive new car for a cheaper used one. Additionally, reduced supply of new cars led to scarcity of late model used cars inducing higher prices in the used car market overall.
As a result, demand was quicker to return to used car markets with broader macroeconomic trends eventually taking hold of prices by 2013.
Will we see a repeat?
It’s hard to say how severe the Covid-19 pandemic will be on the economy, however early signs and reactions indicate an impending recessionary event.
Governments are preparing fiscal stimulus packages to support management of the pandemic as well as the economic fallout.
US Treasury bond yields inverted recently, something that’s preceded every recession in the past 50 years while only being a false signal once.
Another fore bearer, US non-financial corporate debt, usually spikes before a recession. This metric is a good indicator of financial health across US industries as well as smaller private businesses.
As a share of GDP, US non-financial corporate debt has now exceeded the last two major global recessions of 2001 and 2009.
Certainly, financial and economic signals indicate that a recession is on the way with economic analysts predicting Australia will be unable to avoid one.
It’s crucial that participants in the automotive industry begin making preparations now to ensure their survival through any financial stresses.
Worst Case Scenario
Considering all that we saw in the GFC, what are the likely scenarios now?
Despite great uncertainty on the impact Covid-19 may have, having an understanding of a potential worst case scenario allows us to develop strategies to prepare in advance.
Unlike the 2008 Global Financial Crisis, any financial crisis eventuating now will additionally be burdened by drastic quarantine and social distancing measures.
Breaking down the worst case scenario into three phases gives a clearer picture of how the pandemic and its financial consequences may leave a lasting presence.
Phase 1 – Short term, 0-12 months
Some of the outcomes may include:
- similar to Italy, South Korea and China a significant proportion of the population becomes infected
- quarantine, social distancing measures and worsening health conditions drastically reduce consumer spending and economic productivity
- demand for cars drops to people who need to buy out of necessity
- restrictions on trade movements and reduced productivity causes severe disruption of supply lines creating shortage of stock
- severe drop in new and used car sales
- global recession causes bankruptcies and reduced business investment
- dealer network potentially shrinks
- prices drop for used cars
Phase 2 – Medium term, 12-36 months
Some of the outcomes may include:
- new infections gradually tail off
- quarantine and social distancing measures gradually relaxed
- recovery in car sales ensues, however continuing uncertainty about the economy creates volatility
- economic recession causes rise in unemployment
- reduced consumer spending limits new car sales
- demand shifts to used cars as a cheaper alternative
- reduced stock entering used car market due to falling new car sales and lowered motor vehicle production
- used car market potentially shrinks causing prices to rise and stabilise
Phase 3 – Long term, 36 months onward
Some of the outcomes may include:
- Coronavirus becomes a regular occurrence, like influenza
- While quarantine and social distancing measures are removed, societal behaviours towards personal hygiene, transportation, social engagements remain
- economy recovers from recession, unemployment gradually drops
- consumer spending increases, bringing with it increasing new car sales albeit at lower rate of growth
- demand returns to a balance between new cars and used cars
Preparing for lasting effects
Along with the financial damage that the Covid-19 pandemic could cause, there are also a few long term lasting effects that may remain.
The outbreak has caused mass change in societal behaviours in ways not seen for nearly 100 years.
Certain behaviours that find greater mainstream support going forward may attract technological investment to progress even further.
Declining Car Usage
As seen in China, Italy and South Korea, quarantine measures gave rise to a reduction in mass transport and road usage as more people spent time working from home than ever before.
It’s likely this form of employment will see greater encouragement moving forward, resulting in decline for car usage.
Coupled with ride sharing services and growth in electric cars requiring far less parts and maintenance, the decline in personal car usage may find greater momentum in the near future.
This poses questions for businesses tied to growth of the car supply in Australia, particularly for the private market.
Businesses may need to rethink their strategic direction and viability within the industry.
Online Car Purchases
Another change that may see growing investment are online car sales. Foot traffic will undoubtedly drop dramatically during quarantine periods, as seen in affected countries.
Consumers are increasingly looking to not only complete their research online, but also the majority of the buying process as well.
Used cars have already seen success in online sales despite the higher chance of issues with underlying vehicles.
Tesla has been a leader in this space globally, while other brands have dipped their toes through out certain periods.
However, with reports in China of brands ramping up online channels, it’s likely this method of sales will grow quickly before long, in countries including Australia.
Finally, the pandemic has highlighted the underlying reliance that businesses have on goods transported by road. With drivers inactive, movement of goods have quickly come to a halt in certain regions of the world.
Additionally, with panic buying ensuing in several countries, online sales and delivery of groceries has seen a surge in activity.
Several technology companies, like Tesla’s Autopilot and Google’s Waymo, are investing billions of dollars on driver less cars.
Media attention is generally given to the benefits and dangers of self driving cars for private consumers, however the coronavirus pandemic underscores the immense benefits available for businesses involved in goods transportation.
Driver-less vehicles would allow goods to be transported far more efficiently on roads. Online retailers would find the time to deliver to end consumers would also shorten.
Australia has seen nearly 2 years of declining new car sales. The coronavirus pandemic will undoubtedly add further strain on businesses already under duress.
Understanding the impact of the last Global Financial Crisis provides some indication of what to expect should another financial crisis eventuate.
By developing strategies now, businesses in the automotive industry can improve their ability to endure any prolonged downturn in the economy.
Furthermore, the coronavirus pandemic highlights underlying changes already in motion in the industry that may accelerate as a consequence of the medical, social and economic fallout.
Businesses that position themselves now to take advantage of these changes will stand a better chance of success in the future.
By Tanim Ahmed, Head of Product at Datium Insights
Tanim has spent a decade in the Leasing and Finance industry, specializing in Residual Value risk. Please contact Datium Insights for further analytical support and advisory services.