Global Autos On Track For Cherished “V” Recovery But Stall Mode Spooks Investors

Automotive industry investors hopes for a “V” shaped global recovery from the coronavirus crisis look like being fulfilled at least for a while, although there are worries it might still stall before the end of the year.

That’s the view of industry forecasters, who expect global sales in 2021 to almost regain 2019 levels, after the virus caused unprecedented mayhem in the first half of 2020.

Global new vehicle sales fell 25 to 30% in the first half, including 15% in China, 24% in the U.S. and 40% in Europe, according to Fitch Ratings.

In 2019, global sales totaled about 90 million light vehicles – sedans, SUVs and pickup trucks – are expected to fall to 75 million this year, and rally to 84 million in 2021, automotive forecaster LMC Automotive said.

“We expect a recovery in the second half of 2020 and 2021, albeit to a lower level than before the pandemic. We assume global new vehicle sales will drop by about 20% in 2020 as the recovery will be constrained by the adverse economic environment in the coming quarters,” Fitch Ratings analyst Emmanuel Bulle said in a report.

LMC Automotive is also fairly optimistic, with a dash of restraint.

“The speed of the recovery, given the nature of the pandemic shock, has been surprisingly strong. However, the key question is whether this level of sales can be and will be sustained. Our 2020 forecast has been lifted slightly as a result of the faster-than-expected rebound, but a cooling-off period appears likely beyond the new few months,” an LMC Automotive report said.

Investment bank UBS said Europe’s recovery is being led by electric vehicle sales boosted by big government subsidies and economic stimulus programs. It also worries about losing momentum later in the year.

“The investor debate is now whether the positive momentum can be sustained or fading pent-up demand and stimulus impact could lead to a deceleration in the course of the second half,” UBS analyst Patrick Hummel said.

Hummel said the surge in electric sales means most big carmakers will be able to meet their carbon dioxide (CO2) emissions targets set by the EU, and therefore miss big fines.

But the slump in sales will weigh heavily on car-making fundamentals and blast a big hole in profits.

“The fall in revenue will strongly impair fixed-cost absorption and will have a material effect on profitability across the sector in 2020. We believe the sector’s combined operating margin could drop to about 2% this year, from 5.5%-7% since 2010. Profitability recovery will depend on the success of cost-saving initiatives and pricing resilience. We expect the operating margin to rebound to about 4% in 2021 and to more than 5% in 2022,” Fitch Ratings Bulle said.  

“Carmakers continue to face massive investments to meet the ongoing fundamental sector shifts, including the rapid development of new energy powertrains, autonomous vehicles, different forms of car ownership and new mobility services. In addition, the global geopolitical backdrop remains uncertain, and risks from the U.K.’s decision to leave the EU and potential further global commercial conflicts are still acute,” Bulle said.

LMC Automotive said the U.S. recovery is being hit by a renewed Covid-19 surge. It also reiterated its nervousness about the shaky nature of the recovery.

“Direct economic support from governments will have a limited duration. When job and business support schemes end, or are tapered, a renewed macroeconomic slump could emerge, damaging underlying vehicle demand,” LMC said.

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