Automakers got a bailout after the last recession, what’s their strategy this time around?

The beginning of a new month traditionally sees a burst of new vehicle sales data from automakers. This year, however, only a handful have released their numbers. The delays reflect complications related to the coronavirus lockdowns, as well as the decision by some manufacturers, including GM, to switch to quarterly reporting.

While there have been signs of a modest “recovery” in recent weeks, demand isn’t expected to approach anywhere near normal this year. That’s raising a disturbing prospect for an industry where losses are mounting fast and manufacturers are racing to shore up balance sheets to head off the sort of crisis that found two of Detroit’s Big Three automakers plunging into bankruptcy little more than a decade ago.

Last year was one of the industry’s best on record, with U.S. sales hitting 17.1 million. This year was expected to see only a modest decline, with various forecasts ranging from 16.7 million to 16.9 million. Now, however, the figure could fall as low as 12.4 million, according to analytics firm J.D.Power. And that’s assuming there won’t be another wave of the coronavirus shutting the country down again next autumn.

“People have lost their jobs or fear losing their jobs and they’re certainly not going to spend money on large-scale purchases like an automobile,” said Joe Phillippi, head of AutoTrends Consulting.

If the pandemic can’t be brought under control, especially if there’s a second wave of infections, that could threaten the very survival of weaker auto manufacturers, added Phillippi. “A lot of players are starting to sweat.”

The most vulnerable, according to industry analysts, are low-volume companies such as Mazda and Jaguar Land Rover. But large companies aren’t invulnerable.

After Ford posted a $2 billion loss for the first quarter of this year, some experts have begun to question the long-term prospects for Detroit’s second-largest automaker. Ford may even need to consider a tie-up with rival Volkswagen, with whom it formed a series of alliances last year.

“It doesn’t have to be a full merger, although I wouldn’t rule anything out,” said Adam Jonas, the widely regarded automotive analyst at Morgan Stanley, in a note to clients.

Ford has downplayed such speculation. Chief Financial Officer Tim Stone said the company has $34 billion in cash and another $35 billion in liquidity, enough to keep operating “through the end of the year.”

The impact of the coronavirus pandemic has been twofold for the auto industry, first in the form of the ongoing slump in demand. Sales started the year out well and things looked good until the latter weeks of winter. Then the bottom fell out, with March sales tumbling by about 39 percent. April was “a record down month,” according to research firm Edmunds, with sales down by 52.5 percent, barely half of what they were a year earlier.

That actually wasn’t as bad as many had forecast, Thomas King, chief data officer at J.D. Power, warned early in April that sales could plunge as much as 80 percent as most of the country went into lockdown to try to reduce the spread of the coronavirus.

It helped that manufacturers rushed in with hefty new incentives, and the fact that many dealers have rapidly adopted new strategies to work around pandemic lockdowns, including online retailing and contactless deliveries.

“It has been breathtaking to me to see how fast that has happened,” Jim Farley, Ford’s chief operating officer, said Thursday.

Overall, the downturn has created a situation for the auto industry similar to that facing oil producers who now have such a glut of crude they’re running out of places to store it. New car dealer lots are overflowing and manufacturers have had to lease space to handle all the excess vehicles they produced before factories were forced to shut down in March.

The Jupiter Spirit, an automotive cargo ship bound from Japan to the U.S. with 2,000 Nissan vehicles on board, arrived at the Port of Los Angeles on April 24 after a three-week journey. It spent five days anchored a mile offshore, however, since there were no places left to unload its cargo, Bloomberg reported.

On the plus side, the huge inventory build-up has made it easier for the industry to weather the ongoing shutdown of production across the world.

In the U.S., manufacturers continue to push back the timing of most plant start-ups. With large portions of their production base located in Michigan, Detroit’s Big Three will likely delay again now that Gov. Gretchen Whitmer has extended that state’s lockdown through May 28.

Manufacturers are hoping that lessons learned during the Great Recession can be put in play today to weather the latest storm.

Ford has scrapped plans to develop an all-electric SUV for its Lincoln brand as part of a joint venture with EV start-up Rivian. General Motors has reportedly pushed back development of a number of vehicles, including several versions of its Chevrolet Corvette sports car.

Ford and GM have both taken steps to shore up their balance sheet. GM has stopped its dividend payments, canceled a stock buyback program, and delayed the payoff of a revolving credit line.

Ultimately, Phillippi said, “the problem is that there are just so many unknowns.”

When will the industry be able to get back into production? Will there be enough buyers? Will the coronavirus return, triggering another round of lockdowns and plant closures that could do even more damage to the global economy than what we’ve already seen?

If that happens, automotive analysts warn, that would create a crisis far worse than what was seen during the Great Recession.

Leave a Reply

Your email address will not be published. Required fields are marked *