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Tuesday, 05 May 2020 17:55

Coronavirus Pandemic Could Force Consolidation Amongst Automotive Suppliers

Written by Daniel Harrison, Automotive Logistics

Index

The COVID-19 pandemic will exact a heavy toll on automotive manufacturers and suppliers, who will face mounting financial losses and growing debt.

Some may not survive, at least in their current form or without further government bailouts. Such financial fallout, and the need for companies to reduce costs and consolidate investments, could prompt more consolidation at all levels of the automotive industry in the coming years.

 

However, even in the coming weeks and months, as more companies begin restarting production and distribution, the risk of failures in the supply chain could also prompt more immediate consolidation, especially among tier suppliers. In some cases, larger manufacturers might have little choice but to acquire niche players to avoid bringing their supply chains to a halt.

 

Automotive suppliers were facing financial and operational strains even before the crisis, with their margins increasingly under pressure, as we reported at the beginning of the year in our tier supplier profit analysis. There were already signs of increased mergers and acquisitions (M&A) among suppliers to pool resources and invest in the shift to electrification, as well as other technologies, such as autonomous vehicles (AVs) and connectivity. 

 

The current crisis looks set to knock back the timelines and reduce previous investments in some areas, as is already evident as carmakers such as Ford cull spending on AVs and delay new electric vehicle (EV) launches. The pandemic could also put pre-coronavirus deals at risk. BorgWarner’s acquisition of Delphi Technologies, for example, has been threatened by Delphi’s need to tap extended credit lines.

 

However, on the whole, the crisis is likely to accelerate the trend towards consolidation.

 

More suppliers are already moving into survival mode. In countries under strict lockdown, vehicle sales over the past six to eight weeks will have been at close to zero. Even as dealerships start to reopen, a combination of ongoing social distancing measures and restrictions, and a severe recession, are likely to supress vehicle sales.

 

We expect global vehicle sales to fall drastically this year by around 20% compared to 2019, with major regions like Europe and North America likely to see even worse falls.

 

First quarter results among larger tier suppliers have already been grim---and only show part of the picture given that, outside of China, lockdowns mainly began in March. The coming months and quarter will be much worse, especially as the impact on both lower sales as well as cancelled or delayed vehicle programme becomes clearer. 

 

According to analysis from IHS Markit shared during the Automotive from Ultima Media Livestream Coronavirus Series, current product delays will knock off an average of $107 million in revenue from the top 50 suppliers over the next year. For Robert Bosch, the world’s largest supplier, this impact alone will be $560 million.

 

Supply chains are also look set to remain highly disrupted. Differing restrictions across countries and states are challenging efforts to restart production, while further outbreaks could lead to new restrictions. Production schedules are likely to be subject to frequent changes, making it difficult for tier suppliers to manage their own planning.


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