Managing Director, Shanghai
All this comes on top of the demands of an industry preparing itself for a historic transformation away from traditional vehicles; companies must ‘rapidly reduce’ their breakeven points and be ‘microscopically selective’ with capital allocation
Shanghai (June 9, 2020)—Coming in the midst of both already-softening automotive markets globally and a once-in-a-lifetime transformation away from traditional vehicles and systems, the effects of the Covid-19 crisis are presenting the entire auto industry with severe revenue and cost challenges, along with some very tough capital-allocation choices. In particular, due to lockdowns, slow restarts and lingering blows to consumer confidence and employment, the industry faces a cumulative volume drop of up to 36 million vehicles this year through 2022 (compared with sales in 2019), as well as a burden of $72 billion in new debt added since early March of this year. That’s according to new research from AlixPartners, the global consulting firm, entitled The AlixPartners Global Automotive Outlook: Mastering Uncertainty.
The AlixPartners analysis also forecasts automaker sales globally to be 70.5 million vehicles this year (2020), with light vehicle sales in China being 22.5 million units.
Meanwhile, on the supplier side of the industry, the analysis shows that at the end of 2019, before this crisis, suppliers representing only 6 percent of the that sector’s revenues were financially “strong,” according to a proprietary AlixPartners formula and database that includes such measures as debt-to-equity ratios, working capital and return on capital employed (ROCE), while companies representing 50 percent of revenues were either “stressed” (representing 43 percent of revenues) or “distressed” (those representing 7 percent).
“With this sharp drop creating gaping holes in their profit-and-loss statements and ballooning balance sheets, players in this industry should rapidly reduce their true breakeven points to 2008/2009 Financial Crisis Levels—to be able to make profits at global industry sales above 65 million units,” said Shiv Shivaraman, AlixPartners Local Market Leader for Greater China and Performance Improvement Community Co-leader for Asia. “Even in China, which has now experienced a rapid ‘v-shaped’ rebound during April and May of 2020, we expect to end the year with a 9% decline in sales for 2020 and China auto sales will only return to 2017 peak values after 2025.”
Meanwhile, other parts of the AlixPartners research find further evidence that suppliers and automakers alike indeed entered this crisis in worse financial shape than during the Financial Crisis. For instance, according to the research, ROCE—an important measure of profit and capital efficiency—had declined 47 percent on average for automakers globally last year versus 2015 and 36 percent for suppliers. In addition, it also finds that from 2015 through the first quarter of this year, debt loads for suppliers increased 33 percent while for automakers total debt was up 36 percent in the same period. And all that was before, notes the study, Covid-19 added an incremental $72.1 billion in new debt—$19.7 billion in new term-debt and $52.4 billion in drawn-down revolving credit—to the books of automakers and 50 suppliers globally, beginning in early March through May 22nd.
“The impact of the Covid-19 crisis globally is as if a market the size of all of Europe had vanished for the year,” said Dr. Stephen Dyer, Managing Director in AlixPartners’ Shanghai office and head of the Greater China Automotive practice. “Clearly, automakers, suppliers, mobility players and all others connected to this industry need to be microscopically selective with their capital-allocation decisions—closely and unsentimentally examining each and every program and spend for its cash and profitability implications. To weather the storm, companies need to be courageous, yet forward-looking in their decisions, all the while taking full advantage of any favorable governmental policies available to them.”
The AlixPartners global sales forecast for this year includes what the firm calls a “mixed-speed recovery,” with China (where lockdowns and restarts took place first) recovering the fastest, to 22.5 million units; followed by the U.S., at 13.6 million; and Europe (parts of which were regarded to be hit the hardest by Covid-19), at just 14.1 million. Overall, AlixPartners doesn’t see global sales returning to their recent-peak levels (2017 levels) until after 2025.
AlixPartners is a results-driven global consulting firm that specializes in helping businesses successfully address their most complex and critical challenges. Our clients include companies, corporate boards, law firms, investment banks, private equity firms, and others. Founded in 1981, AlixPartners is headquartered in New York, and has offices in nearly 25 cities around the world. For more information, visit www.alixpartners.com.
Crystal Leung, AlixPartners
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Tong Li, Finsbury
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