Down But Not Out

The US Auto Industry Will Bounce Back Strong

No place for the faint hearted

Existential crises are familiar to the auto industry. For the last 35 years auto makers have faced one threat after another, and even before COVID-19, the industry was again under pressure; the trade war, environmental concerns, legislative pressure, changing patterns of consumer demand and the search for alternative forms of mobility have each generated significant pain.

Then came the hammer blow of COVID-19 – China’s Hubei Province, the original epicenter of the crisis, is a major vehicle component hub serving OEMs around the world. Its closure caused massive supply chain disruption and quickly impacted production. Then, hard on its heels, consumers pulled back from auto purchases on a scale that threatens to depress 2020 US sales by as much as 26%. The one-two punch combination of simultaneous demand and supply side shocks rocked the industry.

The sharp punches that COVID-19 dealt ripple far and wide and are a key contributor to current recession forecasts. The auto sector accounts for an estimated 1 in every 22 US jobs, and in its widest orbit touches several industries vital to the US manufacturing economy, including steel, iron, glass, plastics, textiles, rubber and increasingly, software. Fortunately, the industry’s history of fighting back found it better prepared than most to respond.

The auto industry acted quickly and had plans in place

Every year the auto industry deals with sudden localized demand shocks, so when COVID-19 hit, they already knew what to do to stimulate demand. Extreme weather and associated financial hardships are common in the US; in 2019, 25 states experienced severe and damaging weather conditions ranging from floods to fires, with an estimated cost of more than $40billion. In response, the auto industry always has a range of plans ready to go that are designed to maintain demand while also helping existing customers through the pain, e.g. various flexible payment plans and low-price deals. Obviously, COVID-19 impacted the entire US, so the industry took its regional disaster response plans national, and they’ve been effective. Results from ENGINE’s CARAVAN’s omnibus survey of 1,003 US adults conducted May 13-15 showed that between 50% and 66% of those who delayed buying because of the crisis can be lured back by discounts and incentives, better financing terms, improved trade-in deals and deferred payment plans.

The demand shocks could quickly correct, but the supply-side will take longer

Automakers have reopened their plants, but workers returned to a very different environment than the one they left – new since the workforce was last at work are increased cleaning protocols, mandatory masks and goggles, plastic partitions on assembly lines, workstations modified to ensure social distancing, and thermal cameras to detect fevers. Plainly, safely scaling up production will be a careful and slow process, with the result that 2020 US vehicle production will only reach the levels last seen in 2011.

Meanwhile, there are encouraging signs of a resurgent consumer demand: The CARAVAN survey showed the sheer scale at which consumers pulled back because of the COVID-19 shock – 42% delayed a vehicle purchase and they did so because of concerns about the impact of the crisis on their personal finances. But for most, this will be a temporary retreat – the proportion of US adults who intend to buy a new vehicle in the next 12 months currently far exceeds the levels typical even in a good year, especially among the 35% of Americans who expect their personal finances to improve in the next 12 months. And for the rest, the deals and finance terms now available may still prove just too tempting to resist.

The automobile is right for the times

For the last decade, ride share and alternative mobility providers have claimed that Americans would no longer need cars, and yet each year auto sales grew! And now, once the industry safely scales back up, the COVID-19 crisis will deliver auto makers with an unexpected silver-lining: in the same CARAVAN survey, consumers shared details of their pre-crisis mobility patterns as well as the changes they’ll make in response to the COVID-era, and it’s clear that the automobile is the hands-down winner. More than a quarter of US adults expect to use their vehicles much more often, while a further 13% expect to use their cars a little more. In contrast, every form of shared transportation where the risk of exposure to the virus is high will be used less; trains and subways will see declines approaching 10%, while ride share and taxi use will decline by 6-7%.

And the sliver-lining runs deep – another string in the argument that the cars days are numbered is that Millennials and Gen Z will not be tempted into vehicle ownership. If that was ever true, COVID-19 might just have tilted the balance – personal car usage is set to increase from Boomers to Gen Z.

Coming out swinging

In its 134-year history the auto industry has taken some heavy blows, and there is no doubt it will do so again. Most recently, the demonstrations and pockets of vandalism in the wake of George Floyd’s death at the hands of law enforcement have dampened demand, and left some dealerships on the brink of closure, but the industry always bounces back. COVID-19 put the industry down for the count, but while it may be down it is far from out, and it will come back swinging.

Written by Andy Turton, SVP at ENGINE Insights.