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Automakers limp out of worst quarter in living memory

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Automakers limp out of worst quarter in living memory

Almost all global automakers are preparing to report significant losses for a calamitous second quarter, analysts estimate, switching industry watchers' focus from profit to cash flow management and survival.

Three analysts interviewed by S&P Global Market Intelligence said the three-month period to June 30, during which the bulk of global auto manufacturing and retail was shuttered amid coronavirus lockdowns, was the most devastating they had witnessed in their career. Of the major automakers with a global presence, analyst polls by S&P Global Market Intelligence show that only South Korea's Hyundai Motor Co. and Kia Motors Corp. are expected to report an operating profit.

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In absolute terms, U.S. automaker Ford Motor Co. could fare worst with predicted losses of $5 billion, followed by General Motors Co. and Fiat Chrysler Automobiles NV. None of the major automakers have been able to offer full-year guidance due to a lack of visibility, but ratings agencies and consultancies have predicted global auto sales to drop 20%-25% in 2020.

"It's not like a normal recessionary scenario where the recession slows activity. This has dropped vertically. That's why we're in unknown territory to a certain extent," said Owen Edwards, associate director in the automotive unit at accountancy firm Grant Thornton.

"I would ignore the profitability. It's a question of 'are they cash-strong?' ... Cash management is absolutely critical at this time in order for companies to survive and thrive."

Edwards said automakers' path out of the recent lockdown could assume a "W" shape. This would play out as a strong initial rebound, something already being witnessed in China, followed by a period of slower sales due to weakening consumer confidence that would precede a gradual recovery.

Early analyst estimates for the year's remaining two quarters indicate all major carmakers will return to operating profit with the exception of Nissan Motor Co. Ltd., which is in the early stages of a turnaround plan. However, many have announced drastic job losses and reduced investments in new technologies in their efforts to achieve this.

As one of the biggest employers and manufacturers in numerous major economies, governments have stepped in to help with measures to spur sales, including subsidies. Unlike a decade ago, many of the countries that have announced such initiatives are making this cash available only for the purchase of hybrid and electric cars, which could limit their intended stimulus effect.

Other measures include state loan guarantees, such as a €5 billion credit line that Renault has secured with backing from the French government.

Such help may come at a cost, however, if it leaves automakers increasingly beholden to their helpers, according to Jim Saker, director of the Centre for Automotive Management at the Loughborough University in the U.K.

When French President Emmanuel Macron in May declared his ambition for the country to become Europe's top producer of low emission vehicles, he also said domestic automakers should avoid transferring production of locally made cars to other locations. Indications that Honda and Nissan will concentrate more production at home in Japan are further signs of a more nationalistic attitude, Saker said.

"You've got governments involved now trying to influence and stabilize the situation, but also putting massive conditions on what the car manufacturers can do. So in reality, they lose choice of location and they lose product range," Saker said, referring to government policies nudging automakers to speed up electrification.

"I've argued for a number of years that the motor industry is no longer in control of its own destiny. Now it's been weakened and I think it's in even less control of its destiny as a result of COVID-19."

Electric-car maker Tesla Inc. is expected to fare better than its U.S. peers, with analysts at Credit Suisse forecasting a 10% quarter-over-quarter drop in total deliveries. CEO Elon Musk suggested in an internal email seen by Electrek that the company may be able to break even for the quarter with a strong final few days.

Tesla's resilience may be in part due to a business model that emphasizes online sales, something that anomalously made it the top-selling brand in the U.K. in April and May as rivals' dealerships were shut.

This highlights what Christoph Sturmer, global lead analyst at PwC's Autofacts consultancy, said is a flawed practice in Europe. Rather than dealers selling cars from larger stocks held on their premises, the European market tends to operate in a made-to-order fashion, with sales passed on to manufacturers by dealers, resulting in longer waiting times for final delivery. Some of this is related to cars' higher prices in Europe that prompt buyers to keep within budget by handpicking optional extras that come as standard in some other regions.

"What we see is that the Chinese and U.S. sales model that is more stock-based and offers dealers more independence was much more resilient in the crisis than the more centralized and leaner sales models in Europe," Sturmer said.

"Everybody was on the [coronavirus] lockdown but the Chinese and U.S. dealer salesperson just took their mobile phone and called their clients."