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Auto industry investors are hoping for at least a “U” shaped recovery in Europe after the coronavirus-induced slump in sales, aided by “cash for clunkers” government help, and perhaps more subsidies to spur electric car sales.
Not even optimists seem to expect a quick “V” shaped recovery, while nobody wants to talk about a bathtub-shaped turnaround or a dreaded “L” failure.
Some reckon the European Union might be shamed into diluting or postponing its tough regime on carbon dioxide (CO2) emissions, which promises to inflict massive fines on already shaky balance sheets. While others see the possibility prominent manufacturers like Renault of France, already in trouble before the virus brought the industry to a halt, might be forced to seek shelter with a merger.
Investment researcher Jefferies sees a swift recovery after some weeks of standstill.
“We assume auto markets go through a U-shape, with near zero auto and truck assembly for 4-5 weeks. Slow production restarts and consumer confidence yield auto volumes 50% below normal for a quarter and 15% volume shortfall for 2020 versus our previous minus 1% forecast,” Jefferies said in a report.
Jefferies cut an average 35% from operating profit estimates for automakers, and expected governments to introduce scrapping incentives.
GlobalData automotive editor David Leggett also expects government help for the auto industry, and perhaps a reconsideration of the impact of the European Union’s CO2 targets.
“Past experience shows that scrappage policies can help to stimulate new car purchases and kick-start demand to boost orders and get factories working again. They could well be on the policymakers’ agendas later in the year,” Leggett said.
“Also, I would imagine that tough new regulations for average CO2 targets in Europe could be looked at again in these extraordinary circumstances. Apart from anything else, automakers can argue that shuttered plants and a much lower level of new vehicle sales and subsequent usage will have helped to reduce their net CO2 impacts this year. Policymakers will be very wary of anything that drags further on companies’ bottom lines or risks reducing activity and employment levels further,” Leggett said.
Forecasts for European sales of sedans and SUVs in 2020 have fallen from a modest 5% drop only a month ago to up to minus 25% now. Berlin-based ratings agency Scope has said Western Europe’s auto market will shrink around 19% in 2020, contributing to a 9% decline in new car sales worldwide. Standard & Poors Global Ratings said Europe’s Gross Domestic Product (GDP) will decline 0.5% in 2020, and car sales for the continent as a whole could fall up to 20%. They totalled 20.7 million in 2019.
Citi Research also expects some form of government intervention in the automotive sector, including scrappage incentive schemes. Citi said Renault and Mercedes parent Daimler have pressing liquidity needs.
Jefferies expects some corporate casualties, but doesn’t name names.
“Industry rationalization is overdue and not all (manufacturers) will emerge intact. Some capital structures need re-building, but it is not clear that existing shareholders or equity markets have the means/appetite to do so, supporting potential M&A (mergers and acquisitions,” Jefferies said.
