- Current Situation
- Coronavirus Impact
The US automobile industry stands at the second largest in the world with total annual vehicle sales adding up to ~17.5 Million Units in 2019. The industry has a long history which covers several peaks and troughs. The US automobile industry rose to prominence with the rise of the big 3 automakers (GM, Ford and Chrysler) during the 1920s. The industry has always had a significant global presence and produced ~75% of the total global automobile volumes during the 1950s. Post this period, the rise of global auto giants outside the US created an immense competitive regime that transitioned the industry to its present structure.
The auto industry in the US currently comprises of more than 15 large vehicle brands with significant national presence and sales, competing intensely to capture larger volumes of vehicle sales. The total volume of vehicle sales has contracted at an annual rate of ~0.51% during the period 2015-2019 and has faced stiff challenges to expand during the period.
The key factors behind the weak growth in the industry during the past 4 years primarily revolve around the rising interest rate cycle and the emergence of large disruptive themes in the automobile industry. The disruption emerged with the growth of new taxi aggregators and car-sharing services which have made mobility easily accessible without car ownership. The rise of electric vehicles, which are accompanied with a higher purchase cost, has also prompted consumers to defer their buying while at the same time hurting the sales of internal combustion vehicles.
As a result of the slowdown in growth, the industry has seen a rise in competition amongst the large auto giants who are aiming for a larger share of the total vehicle sales. Going forward, the industry is all set to enter a period of high stress in the light of the emergence of the Coronavirus pandemic and faces a grim outlook due to the same.
The number of coronavirus cases in the US has risen exponentially in the past one month from 75 cases on March 1, 2020 to 55,081 cases on March 25, 2020, including 785 deaths. The exponential rise in the number of cases has pushed the US to the top of the table of countries with the highest number of Coronavirus cases. This has prompted authorities in the US to advise its population to incorporate a trend of social distancing and isolation with some states in the US also imposing a lockdown.
This is set to take a heavy toll on the normal operations of businesses in the US economy. The impact of a further spread in the number of virus cases in the country can lead to an increase in stringent actions by the US government, in line with the actions taken in other virus-stricken countries, to contain the spread of the virus which can push the country into a recession. The resultant rise in unemployment and reduced aggregate consumption is expected to impact consumer sentiment significantly. This is expected to hit the prospects of consumption of durable goods significantly. As a result, the total demand for automobiles can take a severe hit due to the deferment of buying by consumers. A longer timeline to contain the virus pandemic will result in a larger impact to the demand of automobiles which creates an atmosphere of near-term uncertainty.
On the supply side, the industry is also set to face severe pressure in light of its globally integrated supply chain with a large share of its automobile components and parts being imported from European and Asian economies. The industry is highly vulnerable to supply side disruptions due to this dependence on foreign automobile component manufacturers.
Exports of automobile components from China, Italy, Germany and South Korea formed approximately ~27% of the total US automobile component imports. These countries stand amongst the worst impacted by the Coronavirus pandemic.
The governments of these countries have imposed lockdowns and restrictions on their population which has impacted their manufacturing capabilities. This has impacted the shipment of automobile components and parts from these countries. The restocking of these components for continued manufacturing of automobiles in the US is at risk and is expected to be hit by shipment delays and supply disruptions that have emerged in the aftermath of the lockdowns in these countries. This is expected to constrain the ability of the industry to ensure continued component supplies as the virus pandemic has spread globally.
A combination of the expected slowdown in the overall sales of vehicles and the impact of delayed auto component supplies is expected to hit the large US automobile manufacturers significantly.
To make matter worse, the top US automobile manufacturers carry an enormous amount of leverage on their books. A deep slowdown in auto sales can impair the ability of these companies to meet their repayment obligations. A scenario of prolonged economic impact in the US as a result of the Coronavirus pandemic can force these companies to seek bailouts from the US government to avoid bankruptcies in line with the situation, they faced in 2008. The future prospects of the large players in the US auto industry is dependent upon a timely and effective solution to the global Coronavirus crisis.