Economic Update

Published 01 Jun 2020

While immediate results suggest the automotive industry is set for a considerable contraction this year, there are some indications that social distancing concerns could actually lead to a spike in future car sales. 

After recording the first cases of Covid-19 in December, China was the first country to experience a decline in its automotive market, with light vehicle sales falling by 18.6% year-on-year (y-o-y) in January. This was followed by the country’s largest-ever recorded fall in February, when y-o-y sales contracted by 79.1%.

As the pandemic spread, so did the economic fallout. In March the EU’s light vehicle market contracted by 44% y-o-y and ASEAN’s by 40%, while in April new passenger vehicle sales in the US were down 46% on the same period last year.

The fall in sales has been primarily driven by the economic impact of the coronavirus. A sharp rise in unemployment has led to a considerable drop in consumer spending.

In terms of the overall outlook for 2020, London-based intelligence consultancy IHS Markit has forecast that global light vehicle sales will contract by 22% this year, to a total of 70.3m units.

Rebound in demand?

Although activity fell considerably in the immediate aftermath of the virus, some countries have seen a rebound in their automotive industries, while there are suggestions that the pandemic could actually lead to a spike in vehicle demand.

After posting double-digit falls in vehicle sales in the first three months of the year, China – the world’s largest automotive market – recorded a 4.4% y-o-y increase in purchases in April. Remarkably, this was the country’s first increase in 22 months.

While the lifting of lockdown measures after three months of relative inactivity was largely responsible for the turnaround, other consumer preferences also contributed.

Crucially, the fall in vehicle demand also coincided with a reduction in public transport and ride-share usage, as people sought to adhere to social distancing guidelines.

This is reminiscent of a trend seen during the SARS outbreak in China in 2002 and 2003, when the fear of infection led many to avoid public transport, and resulted in an increase in vehicle demand.

In fact, Google search data for April found that searches for car purchasing options had increased in both the US and Europe. While there is no guarantee that such results will translate into actual purchases, at the very least they suggest a shift in opinion.

Significantly, those showing an interest in purchasing vehicles are younger people, in a key reversal of historic preferences.

According to a survey released by French consulting agency Capgemini in April, 45% of people under the age of 35 said they were considering purchasing a car this year, considerably above the overall average of 35%.

The report, which surveyed opinions from 11 countries including China, India, the US, the UK and Germany, also found that half of this younger age group would use public transport less and take their own car more often in light of the pandemic, while 44% would use ride-hailing services less due to health and safety concerns.

Emerging market production

The drop in global demand in the first quarter of the year has naturally had a significant impact on vehicle-producing countries. This is a crucial issue for emerging markets like Indonesia, Mexico, Morocco and Thailand, all of which have significant automotive manufacturing industries.

For example, in Mexico and Brazil, Latin America’s top auto manufacturers, production fell by 99% y-o-y in April, with the two countries building just 5600 vehicles between them, instead of the business-as-usual total of more than 500,000. Meanwhile, in Thailand y-o-y production for April declined by 84%.

While the closure of factories due to health concerns and the sharp drop in demand were major reasons behind the fall, in some cases companies were forced to stop production due to a lag in the supply of raw materials and parts, the majority of which come from China.

However, just as sentiment and demand have tentatively improved in recent months, so has production activity.

In Mexico, whose auto industry is closely linked to that of the US, factories resumed production in mid-May, with global giants Toyota, Nissan and Honda rebooting their operations in the country.

In Indonesia, operations are similarly set to resume in early June, with production lines to initially run at a capacity of 50%.

While this is a positive development, some of these countries would feel significant economic pain if there is an extended downturn in the global automotive industry.

Auto manufacturing accounts for around 10% of GDP in both Thailand and Indonesia. In Mexico, where the industry makes up 4% of GDP, vehicles are the largest export product. Likewise, in Morocco significant growth in recent years has seen automobiles become the top industrial export, earning Dh72.3bn ($7.4bn) in 2018.

Indeed, in late May Japanese carmaker Nissan announced plans to cut global production by 20%. Plants in Indonesia and Spain will be closed, with some operations transferred to Thailand.

Despite the difficult trading climate, there is the possibility that these emerging markets could capitalise on moves from multinational companies to shift some of their manufacturing operations out of China.

Known as the China+1 strategy, this phenomenon appears to have been given a boost by Covid-19, as companies look to diversify their supply chains.

EV demand amid lower oil prices

One element of the automotive industry facing a somewhat uncertain future is the electric vehicle (EV) segment.

The coronavirus pandemic has helped trigger a dramatic fall in oil prices. Some have suggested that this could hinder the development of EVs as drivers look to capitalise on the cost savings associated with lower fuel costs.

While expecting sales of EVs to fall somewhat in the short term, analysts at ING Economics do not expect low oil prices to significantly alter the general trend towards increasing electrification.

First, while oil prices are significantly lower, ING notes that this does not always translate into dramatically cheaper fuel at petrol stations, with production costs and taxes ensuring that cost savings are muted.

Second, improved technology has meant that EVs are becoming more competitive, and in some cases may be financially preferable where there are subsidies and tax exemptions in place.

Finally, while governments are looking at ways to stimulate automotive demand, there has not yet been any movement in regulations governing carbon emissions. China has extended subsidies for so-called new energy vehicles, while it is expected that any potential scrappage system implemented by the EU – which would see consumers given money for trading in old vehicles for new ones – would be focused on EVs.

If implemented, such initiatives could even bolster demand in the segment.

Meanwhile, actions within the market also suggest that any fall in EV demand may only be temporary.

Despite some minor delays due to lockdown requirements, Energy Absolute, the largest EV venture in Thailand, has continued the production of parts and vehicles throughout the pandemic, with its EV vehicle model expected to be unveiled later in the year.

Elsewhere, in Indonesia the government has prioritised the development of its EV segment as part of its Making Indonesia 4.0 industrial strategy.

Leveraging the country’s rich supplies of nickel laterite ore, the primary input in lithium-ion batteries, officials hope that EVs will comprise 20% of the vehicle market by 2025.