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Coronavirus to Deal a Mighty Blow to U.S. Auto Industry

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The deadly coronavirus outbreak, which originated in China, is now fast spreading across nations, wreaking havoc on the global economy. Notably, the number of cases outside of mainland China has exceeded the number inside China. The number of confirmed coronavirus cases in the United States has crossed 4,000. Acknowledging the gravity of the crisis, President Trump issued new guidelines to contain the spread of the pandemic. Mounting COVID-19 cases are likely to dent customer traffic in showrooms and cause supply chain disruptions, spelling trouble for U.S. auto sales.

Corona Crisis Rattles Stock Market, Auto Stocks Feel the Heat

The toxic combo of COVID-19 and an oil price war resulted in the stock market witnessing its worst day yesterday since the epic Black Monday crash in 1987. Monday marked the Dow’s second-worst day in history, with the index plunging 12.9%. The S&P 500 and the NASDAQ also fell more than12% on the day. Even the emergency interest rate cuts to zero failed to prevent stock markets from tumbling, as concerns related to the economic consequences of a global lockdown rose.

Top three U.S. auto biggies — General Motors (GM - Free Report) , Ford (F - Free Report) and Fiat Chrysler (FCAU - Free Report) —hit fresh 52-week lows yesterday. Automakers have taken a severe beating so far this month, with shares of General Motors, Ford and Fiat Chrysler plummeting 31.1%, 28% and 36.8%, respectively. While shares of U.S. electric vehicle maker Tesla (TSLA - Free Report) still remain in the black on a year-to-date basis, the stock has declined 33.4% this month so far. Tesla carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Will the Pandemic Dent U.S. Car Sales?

As we know, COVID-19 has taken a massive toll on the auto industry in China with shutdown of factories and dealerships with less customer traffic.Well, China had put much of Hubei province on lockdown, including Wuhan—touted as the nation’s motor city and home to large manufacturing plants of numerous auto companies. At the peak of the health hazard, at least four provinces and around 50 cities had imposed some kind of lockdown. Amid the crisis, vehicle sales in China, which is the world’s largest auto market, recorded its biggest monthly decline in February. As the deadly virus, is rapidly spreading in the United States, will the nation’s auto industry feel the same heat?

As U.S. state governments have started calling for lockdowns, car dealerships and retail outlets are expected to bear the brunt of low traffic. United States’ first lockdown has been put in place in New Rochelle, NY. Serious outbreaks in Washington and California have raised the possibility of more lockdowns. With Michigan's auto manufacturing sector alone constituting 4.3% of U.S. GDP, two confirmed cases in the state have raised alarm.

Notably, the New York Auto Show, one of the biggest events in the auto industry's annual event calendar, has been suspended. Similar smaller shows in other parts of the nation have also been cancelled. This is not only a financial setback for the firms, which spent millions in preparations, but it may also affect auto sales, which the shows could have stimulated. In a show of unity in the wakeof COVID-19, Ford, General Motors, Fiat Chrysler and the UAW have formed a joint coronavirus task force. The Detroit 3 automakers have asked their employees to work from home effective Mar 16. While no domestic auto factories have been closed yet, it may be the case if the outbreak gets bad enough.

The U.S. auto industry, which had been struggling due to macro-economic headwinds, tougher emission standards, rising costs of vehicles, popularity of ride-sharing services, is likely to get further affected. Demand and supply is anticipated to be severely impacted.

Even if dealerships remain open, the pandemic scare will indeed slow down footfall and auto sales. Apart from dampened consumer sentiments and lower vehicle demand, the industry is also likely to suffer from supply chain issues, if the situation worsens. As it is, the lockdown in China has disrupted the supply chain as 80% of global car production requiresparts from China. While many companies have reopened and ramped up production in China, virus is spreading fast in the United States, thus posing concerns for the auto industry. If the Chinese suppliers don’t buckle up soon or if the global carmakers don’t diversify their supplies, it will be difficult for automakers to source parts required for building cars. Even if the pandemic ends soon, it will take time to address disruptions in the supply chain and restore the product pipeline.

Amid the crisis, many analysts are projecting auto sales decline of 3%-9% in 2020, which may rise to even 15% depending on the duration of the outbreak. RBC Capital Markets now envisions U.S. auto sales in 2020 to decline 20% year over year, marking significant deviation from pre-coronavirus estimates.

Final Thoughts

While February turned out to be a decent month for U.S. auto sales, backed by fat discounts along with President Day deals, March sales report is likely to be abysmal considering the broader market sell-off, weak consumer demand and aggravating corona concerns in the United States.

Carmakers have to resort to cost containment and other strategies to overcome the resultant challenges. Many companies have started offering coronavirus-induced incentives. For instance, Hyundai is offering payment relief for buyers who are laid off. Ford has also implemented payment relief and first-payment deferral plans for new and existing financing customers. However, until coronavirus concerns fade away, it’s uncertain if the incentive policies are likely to have any major impact on car sales. Automakers will have to be prepared for a prolonged period of weakness with sales likely to face the heat at least till the first half of the year.

With a great deal of uncertainty over the state of the economy, consumers are likely to put off car purchases, which are anticipated to impact earnings and sales of auto companies. Market watchers are especially cautious about the industry’s outlook due to the ambiguity associated with the spread and duration of the health hazard.

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