Coronavirus impact will test Detroit's mettle
The economic fallout of the global pandemic will test the resiliency of U.S. automakers, who vowed after going bankrupt a decade ago that they would be prepared for the next downturn.
Why it matters: No one is suggesting the coronavirus means a repeat of 2009's bleak days, when the U.S. auto industry was on the verge of collapse and needed a taxpayer bailout to survive.
- But what began in late January as an issue for auto supply chains in China now threatens vehicle demand around the globe, writes Bloomberg, citing RBC Capital Markets.
- Morgan Stanley analyst Adam Jonas is even suggesting the U.S. should bring back the hugely popular "Cash for Clunkers" rebate program that propped up car sales during the Great Recession.
The state of play: It could be a month or two before parts shortages that began in China ripple through supply chains and potentially interrupt U.S. auto production, industry experts say.
- Many components were already en route to carmakers and suppliers ahead of the Chinese New Year, before the coronavirus threat extended the holiday shutdown.
- Carmakers are using workarounds, like airfreight or alternative suppliers, whenever possible.
- “There are bubbles that haven’t shown up yet,” said Dan Hearsch, a managing director at consulting firm AlixPartners.
- Later this month, for example, there's likely to be a shortage of memory chips from South Korea, says Oliver Wyman consultant Andrew Chien.
The catch: “You need every part to make a car,” says AlixPartners' Mark Wakefield, which means production could be interrupted.
Another problem could be weakening consumer demand: People who are working from home and avoiding airports, conferences and sporting events aren't likely to visit a dealership to buy a new car amid the coronavirus outbreak.
- Auto sales plummeted 80% last month in China and could fall by as much as half in the U.S. and parts of Europe over the next several months, RBC estimates.
- Jonas now expects a 9% sales decline for the year. Before the outbreak, he had expected a decline of 1-2%.
- Analysts are ripping up previous forecasts, with most now predicting sales around 15.5 million vehicles, down from a recent trend of 17 million.
Even if the virus gets much worse, however, sales aren't likely to plunge to the depths of the 2009 crisis, when the industry sold just 10.4 million units.
- General Motors and Chrysler needed a taxpayer bailout in 2009, and Ford barely squeaked by with a well-timed loan.
The industry is generally healthier today than it was back then.
- At GM, for example, CEO Mary Barra spent years shedding unprofitable assets and has vowed to maintain a "fortress balance sheet" to withstand a severe downturn.
- Ford, which is in the midst of an $11 billion restructuring, is in a tougher spot, and some credit rating agencies have downgraded the company's debt. But Ford had $22.3 billion in cash at the end of 2019, and could cut its $2.4 billion shareholder dividend if necessary to power through the worst of the storm.
The bottom line: Detroit's long era of prosperity is about to be upended.
Editor's note: This story has been updated to include further comments from Adam Jonas.