Chip shortages to delay the recovery (and increase the pressure related to structural challenges)

We expect the global automotive sector to keep on with a slow and bumpy recovery, which will intensify the competition, accelerate the adjustments required by the structural challenges and ultimately maintain under pressure the financial metrics of most companies, notably retailers and wholesalers and, more importantly, suppliers.

Indeed, the automotive market is on road to a noticeable slump (~17% in 2020) and the return to pre-crisis levels is not expected before 2023, despite the takeoff of EVs. Confinement measures all across the world due the Covid-19 outbreak led to a massive restriction of mobility and the closure of car dealers, showrooms, auto fairs, registration agencies and factories, pushing down automotive markets into unprecedented slumps. The easing of confinement measures has mechanically contributed to an improvement but the gradual resumption in the demand for cars is to remain uneven across markets – and highly dependent on the magnitude of new confinement measures.

The trend is more favorable in China, which is the largest market (28% of the total in 2019) and, importantly, the country with the strongest post-lockdown recovery. Thanks to the earlier ending of mobility restrictions and to first-time buyers who switched from public transport or shared mobility to private cars, the Chinese market posted six consecutive months of recovery from April to September 2020 and should end the year with a -4% decline, before a +12% increase in 2021 to 28mn units. Europe and the U.S. should keep on posting a decline in H2 2020, pushing their yearly performance down to -23% and -18% respectively, before a partial catch-up in 2021. Indeed, both are mature markets mainly driven by replacement needs: car purchases are less a priority for a majority of households when the outlook in terms of employment and wages remains uncertain or unfavorable, even if, at the same time, the intensifying consumer appetite for ‘greener’ mobility is supporting the taking off of the EV segment.

With less than 77 million units sold globally, down by more than 14 million units from 2019, the loss in turnover and margins is expected to be massive. H1 2020 already posted a major hit on turnovers (-25% y/y for OEM, -28% for suppliers, -25% for tire industries, -40% for car rental) and EBITDA (respectively -47%, -70%, -58% and -84%). In this context, companies have been forced into staff reduction and job cuts, as well as making adjustments in their portfolios and production capacities (both in terms of products/brands and countries) and fine-tuning investment plans. The objective is to preserve the financial metrics and have a closer liquidity management. Destocking offers are helping in the short run, as well as faster rollouts of new models. However: (i) sales of low-emission vehicles are so far generating lower margins compared to internal combustion engine vehicles; (ii) the Covid-19 outbreak added cost containment and reinforced the need to address the risks related to implementation strategies and supply-chain interconnections; (iii) the risk of fines related to CO2 compliance in the EU will constrain the end-of-year race to reach the 2020 target and (iv) the medium term challenges remain to move mobility forward through massive investment and innovation in electrification, connectivity and autonomous driving.

As of Q3 2020, the automotive sector registered 25 major insolvencies at a global level (+16 cases y/y). We expect the bulk of risks to remain on the (independent) retailers and wholesalers, the suppliers, notably tier-2 and tier-3 suppliers, non-EV players as well as the smaller ones. On average, tier-1 suppliers have stronger financial situation and larger size to master the transformation from combustion engine to electric drive, but we expect a higher pressure from car manufacturers. Car manufacturers are not immune in the medium term, notably the European ones if their dependency on the Asian battery intensifies or more globally if they fail to adapt their business model to the new trends.