The AlixPartners Automotive Study Highlights
Coming during an already-softening global automotive market and a capital intensive transformation away from traditional vehicles and systems, our new AlixPartners Global Automotive Outlook explains the effects of the COVID-19 crisis. With lockdowns, lowered consumer confidence, and rising unemployment, the arrival of the pandemic presents the entire auto industry with severe revenue and cost challenges, along with some difficult capital-allocation choices.
In particular, the industry faces a volume drop of up to 19 million vehicles this year against 2019 (figure 1) and 44 million cumulative through 2022 against our previous sales forecast. We now anticipate that automaker sales globally will be 70.5 million vehicles this year with a mixed-speed recovery, where China recovers the fastest to 23 million units (given lockdowns and restarts took place there first), followed by the US at 13.6 million, and Europe (parts of which were among the hardest hit by COVID-19), at just 14.1 million. Overall, AlixPartners doesn’t see global sales returning to their recent peak levels of 2017 until after 2025.
On the supplier side of the industry, our analysis shows that in 2019, before this crisis, financially “strong” suppliers represented only 6 percent of that sector’s revenues. In fact, we find that many suppliers and automakers entered this crisis in worse financial shape than they entered the Great Recession, with an increase in debt of 35% in the past four years, and 8% since December 2019 (figure 2). In addition, automakers and suppliers have raised $74.1 billion in extra long-term debt and revolver since the beginning of Q2 2020 which further increases the total industry debt load. To be prudent, given the uncertainty of the pandemic, companies should get their breakeven points to Great Recession levels to be in line with global industry sales of only about 65 million units, which is our volume scenario for a prolonged recession.
As a result, automakers, suppliers, mobility players and all others connected to this industry need to be carefully selective with their capital-allocation decisions—closely and unsentimentally examining every program and spend area for their cash and profitability implications. At the same time, they should also take full advantage of any favorable government policies available to them.
Among our other findings:
- Prior to the Covid-19 crisis, industry investments in autonomous vehicles were scheduled to be $79 billion cumulatively from 2020 through 2025, but the crisis—on top of other setbacks—means that that spending rate will likely be pared back substantially.
- Around 40 percent ($13 billion) of disclosed automotive-related mergers-and-acquisitions activity last year was in what AlixPartners calls the “CASE” (connected, autonomous, shared-mobility, electric/electrified) domain, while CASE-related partnerships increased 32 percent (to 560), up from 423 in 2018.
- A “moment of truth” is arriving for the European auto industry and European regulators, in that AlixPartners finds a 21 percent gap exists between current European Union automotive targets for carbon-dioxide emissions and the industry’s anticipated performance through year-end 2020—issues that might well require a political solution, or else companies will face fines of 10-14 billion euros in 2021 if nothing changes.