Gas or Brakes: How has COVID-19 changed the global automotive sector?

Contributing roughly $19 billion to Gross Domestic Product (GDP), the automotive sector has long been one of the drivers of the Canadian economy. With more than 125,000 Canadians directly employed in the sector (and a further 400,000 employed in aftermarket services and dealership networks), auto plays a vital role in the economic health of the countryⁱ.

But like all sectors, COVID-19 shifted the sector’s gears into neutral in the early stages of 2020, leaving many to wonder when and how the road to recovery will unfold. The impact on the industry at home has reflected that of markets worldwide, with widespread shutdowns slowing production lines, disruption of the supply chain impacting supplies, and demand slowing to a halt in early 2020. Thankfully the issue is not exclusive to the Canadian market, and trends seen globally and discussed on a recent HSBC webinar indicate the sector could fair well in recovery.

Globally light vehicle manufacturing declined by at least 20% in early 2020, fuelled by a steep (25%) decline in Europe and North America and 15% drop in China, according to Matti Suomalainen, Sector Head, Automotive for HSBC. While there are hopes for some form of a V-shaped rebound in 2021, realistic estimates see a full recovery to 2019 output levels (90 million units) taking a further 3-4 years.

While most of the industry was severely impacted between late February and May, a majority of key manufacturing regions have now reopened. Almost all OEMs in Europe have reopened, signalling a quicker return for production in Europe, and in China OEMs are also back to producing at pre-pandemic levels. With roughly 80% of the world’s auto supply chain connected to China, that level of output can have a massive ripple effect on global production.

Will COVID-19 bolster or burden the greening of the sector?

The electric vehicle market suffered a particular shock thanks to COVID-19, with sales shrinking by roughly 30% worldwide. But even with increasing discussion about sustainability emerging during COVID-19, Suomalainen does not see the pandemic as a driver for a major shift in the sector.

“Europe already has strict emission standards in place and incentives for consumers to buy EVs but still, demand for EVs has remained weak due to high costs and lack of charging stations,” says Suomalainen. “When it comes to North America, governments here have not been as aggressive as the Europeans and are likely still years behind on policy.”

In China, the government is moving forward on the policy side, but consumer desire to go green remains low. However, in an effort to boost EV sales, the government pledged $2.7 billion for the construction of charging stations - an increase of ten times the number built last year. Similar investments in the Canadian market could help to increase adoption of EVs over the long term.

Looking for Positive Signs in Sales

There are strong indicators coming out of the Chinese market that the pandemic has fueled the importance of car ownership for personal transportation, which is a trend Suomalainen expects could emerge in North America and Europe - particularly as many people shy away from airline travel for the foreseeable future.

“US auto sales have been more resilient than other markets,” says Suomalainen, “A key part of this is the fact that 24 states opted to keep dealerships open through the worst of the pandemic. However, the fact that there are greater financial options to support the purchase of new vehicles also played into sales levels in the market.”

While most western automotive clients anticipate to see a base drop of 20-25% in revenue in 2020, many have done a good job of keeping CAPEX in check, and Suomalainen sees financing as central to supporting a fast recovery in the sector. “The vast majority – roughly 80% - of car purchases in North America are done with a financing instrument, so as long as those avenues remain easy to access, car sales should see a strong recovery,” he says.

However, HSBC Bank Canada Chief Economist David Watt shares some concern, given broader economic trends in Canada including increasing consumer debt. “As more and more people carry larger loads of debt, getting access to financing may be more difficult.”

While the outlook on the Canadian and global auto sector today remains bumpy, there are positive signs along the way. With production levels gradually increasing, and financial support options remaining readily available for Canadian consumers, the sector could put COVID-19 in the rear view mirror faster than many others.