APD asked long-time friend and noted economist Jon Gabrielsen to provide 4-5 key points purchasing leaders should consider in planning post Covid-19 strategies and activities.
His thoughts are:
- Don’t plan on a V-shaped rapid recovery
- Peak auto sales will not return to 2018 levels
- Expect Supplier and customer bankruptcies and consolidations
- Global trade will be replaced with regional trading blocks
Below are his thoughts on each of these items:
No V-shaped recovery
- The auto cycle that just ended is massively oversold by pulling/stealing sales forward from the future, with larger and larger cash incentives, zero interest rates, longer and longer loan and lease durations. That has been going on increasingly for 3 years now, so it has built up a huge off-setting payback period.
- Consumers have already experienced a massive shock to their sense of economic security from entry into the Covidian Epoch, even those who have not personally been set back by job loss, pay reduction, and loss of hours. Since vehicles are the second or even first (renters) largest purchases consumers ever make, and vehicles last longer than ever, it makes their purchase easy to delay almost indefinitely.
- There is a massive glut of low mileage used vehicles being returned from leases that in just the last month has lowered average prices by 8%. That make excellent alternatives to buying new for newly frugal and cash strapped consumers and lowers trade-in values driving up the net price for new vehicle buyers further discouraging new purchases.
APD’s Crisis Team has developed a Quick Start Guide to restarting the industry while continuing to deliver strategic supply chain initiates.
Peak sales of 13-14 mil vehicles per year (20-25% lower than 2018)
- The underlying demand for vehicles grew from 1990-2000 fueled by the buying patterns of baby boomers. It peaked just over a 16 million SAAR in the year 2000 and began a slow decline as baby boomers became empty nesters. By 2010 the rate of decline was already accelerating but so much pent up demand had been created by the depth of The Great Recession that post downturn demand was actually able to bounce inordinately higher falling underlying demand would have suggested. But by now over half of baby boomers have retired, generally have bought their last new vehicle and even dropping from 2 vehicles to one, or even 3 vehicles to 2.
- The result of the aging demographics is that this down cycle will be at least 20% deeper than prior downturns, as low as 8.0 million SAAR versus 10.4 million in 2009 and any eventual recovery is almost certain not to exceed 14.0 million SAAR as opposed to 17.5 million SAAR of the last to upcycles.
- Almost all automakers and all suppliers will be at sales below their current breakeven cost structures, even at the next peak of 14.0 million SAAR. And that next peak will probably not arrive for 8 more years.
- Automakers and Suppliers must restructure for breakeven as low as 10 million SAAR in order to be profitable as much of the time as they have been able to do in the past with a 14 million SAAR breakeven.
- The same approximately 20% lower concept applies equally to Europe whose population has been aging earlier than the USA all along.
- Even if achieving a 10 million SAAR breakeven is overly conservative for the long term, it will serve all very well for at least the next 5-years and there will be plenty of time to scale back up later if we are so fortunate to need to.
Supplier and customer bankruptcies and consolidation
- Even the most financially healthy global automakers and suppliers will be substantially challenged by the intensity of this deep and long automotive downturn. But three automakers in particular are at far more risk than the others: Nissan, Ford and possibly GM
- GM will probably make it due to already having divested Europe (Opel and Vauxhall) and having the second most market share in China.
- Nissan will likely continue to shrink but be propped up by the Japanese system.
- But Ford has been in bad shape everywhere except North America for one to two decades, and now with COVID-19, even North America cannot save them. One could write an entire book on the situation with Ford, but suffice it to say that whether it goes in and out of bankruptcy, is acquired purely for it North America truck strength, or some combination of all of that, being a supplier to Ford is going to be a very risky proposition going forward
Global trade replaced by regional trading blocks
- The pendulum swing between globalism and isolationism tends to make a full cycle about every 80 years.
- It began to swing back from the extreme end of globalism even before Trump was elected and tariffs were put in place.
- Tariffs and now the supply chain risks highlighted by the Covid-19 crisis will only accelerate the trend to regionalism of The Americas, EMEA, and Asia.
- The mantra has become “Source and build your products with the region you sell them in”.