U.S. automakers are just starting to feel impacts from the coronavirus pandemic, but experts say the worst days for consumer vehicle demand and supply chains lie ahead.
Ford Motor Co., General Motors Co. and Fiat Chrysler Automobiles NV announced March 18 that they are temporarily halting production in North America to combat the spread of the virus after the United Auto Workers Union urged the three automakers to suspend operations. Tesla Inc. announced March 19 that it would suspend production at its Fremont, Calif., factory beginning at the end of day March 23. Experts say it could take months to ramp back up to normal production.
Meanwhile, supply chain disruptions from plant closures in China, Europe and domestically will soon hit U.S. automakers as they burn through any lingering materials. And the widespread consumer pullback from business closures and government pleas to stay home will curtail demand for new vehicles, though it is unclear just how bad the drop will be, experts said.
Experts are expecting car sales in the U.S. to take a hit as consumers stay home during the coronavirus outbreak.
The impact on vehicle sales will be "massive," according to Charlie Chesbrough, Cox Automotive's senior director of industry insights and senior economist.
"At this point, it is difficult to identify where a bottom may be, but clearly the willingness to buy a vehicle, and the ability to buy a vehicle — two critical components in the market — have changed significantly in recent days," Chesbrough said.
The U.S. could feel the same pain as China, where the virus outbreak began, and Europe. Vehicle sales in China could drop 45% in the first quarter, according to some estimates, while European automakers likely face a tough road ahead amid border closures and lockdowns that have restricted operations.
The outbreak has prompted cities and countries around the world to alter normal activities and pause business operations. U.S. President Donald Trump recommended that people not gather in groups of more than 10 as cases of the virus grow in the country. Globally, more than 246,000 cases have been confirmed with over 10,000 deaths as of March 20, according to Johns Hopkins University's Center for Systems Science and Engineering.
Disruptions spread to the US
As the number of new virus cases drops in China, the outbreak has spread to other countries, including the U.S. That spread and pressure from the UAW prompted the three major Detroit automakers — GM, Ford and FCA — to shut down their North American plans through the end of March.
"The biggest threats we see are really disruptions in supply and production being curtailed here in North America," said Kristin Dziczek, vice president of industry, labor and economics at the Center for Automotive Research.
GM and FCA declined to comment on how these shutdowns would impact production and earnings for 2020.
Ford said March 19 that it notified lenders about borrowing the total unused amounts against two lines of credit, including $13.4 billion under Ford's corporate credit facility and $2 billion under the company's supplemental credit facility. The cash will help offset financial impacts from the production shutdowns, Ford said.
"While we obviously didn't foresee the coronavirus pandemic, we have maintained a strong balance sheet and ample liquidity so that we could weather economic uncertainty and continue to invest in our future," Ford President and CEO Jim Hackett said. The automaker also withdrew its 2020 guidance because of the outbreak.
As auto workers are encouraged to stay home, it could take a quarter or two to ramp back up to a normal production cadence, said Bill Selesky, senior research analyst at Argus Research.
"The financial impact is difficult to predict at this point," he said, adding that it will be "significant" and will cause automakers to adjust earnings forecast downward.
Government recommendations to limit public gatherings in the U.S. have also impacted automakers' product launches, including Cadillac's debut of its first all-electric vehicle. Cadillac was set to unveil the car April 2 in Los Angeles but canceled the event and is evaluating its plans, a Cadillac spokesperson said in an email.
Michael Dunne, CEO of automotive consulting firm Zozo Go, which specializes in China, said automakers have been "extraordinarily silent" on whether the outbreak will delay production in 2020.
"This leads us to conclude there is genuine concern of disruption," Dunne said during a March 6 Center for Automotive Research webinar. "We haven't seen it yet, but maybe later in March."
Demand for vehicles
Automakers sold 1.4 million vehicles in the U.S. in February, up 8.4% over the same month the previous year and an increase from the 1.1 million vehicles sold in January, according to data compiled by S&P Global Market Intelligence.
Experts predict vehicle sales could worsen in March. Already, 2020 projections called for annual sales slightly below the 17 million vehicles sold during 2019. The virus outbreak, however, has only worsened that outlook.
A subsidiary of automotive pricing company TrueCar, ALG cut its 2020 forecast to 16.4 million light-vehicle sales, down 2.9% from its pre-coronavirus forecast of 16.9 million sales. The forecast assumes the economy and auto industry recover to pre-coronavirus levels by the end of April.
ALG predicts light-vehicle sales of 14.5 million, down 14.9% from 2019's sales, if the outbreak causes a longer-term economic slowdown.
Argus' Selesky lowered his 2020 sales forecast following the outbreak, to between 16 million and 16.4 million sales from 16.8 million.
"Absolutely demand will drop," Selesky said. "Consumers are being requested to stay home and avoid contact with other people, hopefully preventing further spreading [of the virus]."
A lack of potential customers at dealerships and consumers delaying purchases of big-ticket items like cars contributed to lower projections, Selesky said.
Even after the initial consumer pullback passes, a slowing economy could delay buyers' purchases by months or years, Chesbrough said.
The National Automobile Dealers Association said dealers were not reporting reductions in sales, service or foot traffic as of the first full week in March. The organization said it is monitoring sales figures closely and aims to survey conditions in the U.S. on a weekly basis.
The auto industry may need to change how it interacts with consumers, Chesbrough said. This includes more online purchasing and less interaction with sales or service people.
"This may be a temporary problem," he said. "However, it is very possible that shift is occurring and what emerges post-coronavirus may be a different market and different consumer expectations."
That would require a change in state regulation, as some states ban selling a vehicle directly to a customer the way Tesla does using its website.
Shipping delays full pain from virus disruptions
Supply chains for U.S. automakers likely will be hit harder from the shutdown in China in the coming weeks and months after the normal lag time in shipping vehicle parts passes. Automakers and suppliers began halting operations and closing facilities in February in China as the outbreak spread and cities were shut down.
There are talks of shortages and logjams in China ports, Chesbrough said, adding that parts needed for vehicle assembly or repairs could be delayed.
"This impact has not likely hit full force yet," he added.
Shipping parts to North American from China takes about 30 to 60 days, according to the Center for Automotive Research, whereas shipments from Japan or Korea take about one to two weeks to clear.
This is causing impacts in the U.S. to be delayed by a month or two, Dziczek, from the Center for Automotive Research, said during the webinar.
Because making a car requires all the parts — even 99.9% won't cut — the disruptions "are going to be sporadic and ongoing for some time," Dziczek said.
Zozo Go's Dunne said automakers who import parts from China will "feel a crunch" later in March.