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U.S. Auto Industry Engine Restarts: Testing Times Ahead

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Majority of auto manufacturing facilities across the United States reopened on May 18, after a two-month shutdown amid the COVID-19 pandemic. While this is a critical move to bring the nation’s largest manufacturing industry back to life, the fate of the auto sector remains highly uncertain.

The coronavirus has dealt the U.S. auto industry a bigger blow than the 2008 global financial crisis. As the industry gets back to business, there are bound to be hiccups from time to time since there is little precedent for such an across-the-board shutdown of operations.It’s difficult to think of a time before this when the entire auto industry, including supply chains and dealerships, had come to a standstill. Indeed, the industry had ceased to manufacture cars during the Second World War, but its plants were retooled to build war munitions and had kept people employed.

Factories Get in Gear

The automotive industry was already facing various headwinds before the virus swept across the world. Tougher emission standards, trade war and heavy investments in emerging technologies, including electric and driverless cars, had been weighing on earnings and sales of auto companies. The virus eruption has aggravated the woes of the industry. Coronavirus-led shutdowns dragged down vehicle sales by more than 12% year over year in the first quarter of 2020. New vehicle sales for April tanked almost 50% year over year amid ‘stay-at-home’ orders and rising unemployment.

The pandemic forced auto companies to shutter virtually every plant in North America, furlough employees and burn through cash. After being idle for almost two months, manufacturing facilities have reopened. German auto biggies like Daimler AG (DDAIF - Free Report) and BMW AG were among the first to commence operations in the United States, followed by Tesla (TSLA - Free Report) , Toyota (TM - Free Report) and Honda (HMC - Free Report) . U.S. auto giants Ford (F - Free Report) , General Motors (GM - Free Report) and Fiat Chrysler (FCAU - Free Report) restarted production yesterday. The auto industry faces an uphill battle now as restarting operations amid a pandemic comes with its own challenges.

While General Motors carries a Zacks Rank #4 (Sell), Ford and Fiat Chrysler are Zacks #3 (Hold) Ranked firms, at present.

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It’s Quite a Bumpy Road Ahead

Even though U.S. auto manufacturing plants are back online, production and sales are unlikely to rebound anytime soon. Carmakers will be facing a litany of challenges, including kink in the supply chain and depressed demand for vehicles amid weak consumer confidence, along with coronavirus safety protocols.

One major issue that automakers will have to watch closely is the financial health of suppliers. The pandemic has dealt a severe blow to auto suppliers, especially the small-to-medium-cap firms. While major automakers have billions of dollars in cash to weather the downturn, it is going to be extremely difficult for auto suppliers to stay afloat. With paltry revenues for weeks, auto suppliers are facing cash crunch and a lack of orders to recall their employees. Additionally, once they resume operations, cash woes are going to intensify. As most suppliers get paid on average 45 days after they deliver their parts, many will struggle financially as the industry gradually reopens.

Per S&P Global Market Intelligence, the odds of default for auto parts suppliers rose in April. Industry experts expect increased insolvency among auto suppliers, which may result in bankruptcies and greater consolidation, as large-cap suppliers will likely acquire the smaller ones to keep the supply chain running. In fact, the Original Equipment Supplier Association says that an influx of around $20-$25 billion is needed to avoid such severe issues. As such, supply chain distortion remains a key concern for automakers. Some auto biggies have already run into complications. For instance, Daimler’s Mercedes-Benz plant in Alabama, which resumed operations last month, again halted production within a week amid parts shortage. Volkswagen also delayed resumption of operations as many of its suppliers needed more time to get the assembly lines rolling again.

Automakers will have to bear the brunt of falling demand for vehicles. Due to the lockdown measures in the wake ofcoronavirus, unemployment rates have increased exponentially worldwide. Weak consumer confidence and high unemployment rates have been weighing on car sales. Amid such uncertain times, consumers are likely to put off spending on discretionary big ticket purchases like cars. Importantly, sales of new passenger and light truck sales plunged 34% and 48% in March and April, respectively, while the unemployment rate shot up to 14.7%.While the companies are offering big discounts and interest-free financing to spur sales, consumer demand is likely to remain low amid the sluggish economy.

Ensuring the safety of employees will be another pressing issue. High absenteeism amid heightening virus scare is also a concern.While the companies have implemented extensive safety protocols for workers, the reopening of plants will be closely monitored by government officials. Rebooting the industry to adapt to the pandemic will be a slow and arduous process. Even if the restart of the business goes as planned, there might be a resurgence of infections, thereby shuttering production again. Meanwhile, complexities of new safety policies are weighing on employees and the companies alike.

Final Thoughts

The auto sector is a major component of U.S. GDP and a return to vehicle production will provide the economy the much-needed boost. However, there is no guarantee that the companies will be able to function smoothly, as the coronavirus pandemic is showing no signs of dissipating. As of now, given the various headwinds confronting the industry, it’s unclear whether production and consumer demand will ramp up enough to help the industry survive without federal aid. As we know, the auto industry received $80 billion bailout in 2009 to help companies restructure during the financial meltdown. The coming weeks will be extremely crucial and will determine if the auto industry will require stimulus to curb the fallout from the virus outbreak.

However, one thing is certain: the pandemic will transform the auto industry and companies will have to chalk out strategies to adapt to a post COVID-19 era. While some automakers may emerge stronger, others might find it difficult to survive on their own. One can expect a greater need of consolidation in an attempt to share costs and gain scale.

Thus, ‘find a way or fade away’ seems to be the catchphrase for the auto industry now.

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