New production realities amid the Covid-19 crisis

5 min read

Retail & Wholesale

This is the first weekly update from our automotive team on how the Covid-19 pandemic is affecting our clients and the sector as a whole.

Wholesale & Retail

We’re continuing to work closely with our colleagues and customers across the automotive sector to assess the impact of the Covid-19 pandemic – and how to respond.

Mike Hawes, CEO of the Society of Motor Manufacturers and Traders (SMMT), continues to warn of his “deep concern”, with Jaguar Land Rover, Ford, Nissan and Vauxhall all having closed factories in recent days. You can hear more from him as part of our Covid-19 Automotive webinar, which you can listen to here.

The SMMT’s data suggests car manufacturing fell 0.8% in March, with 122,171 vehicles rolling off the UK production lines. That reflected falling demand in key global export markets, but April’s data is likely to be much worse with so many manufacturers now pausing production altogether.

The SMMT’s initial assessment suggests shutdowns will see production fall by around 200,000 units over the course of the rest of the year, to just below 1.1 million. That would be an 18% fall in 2019, though the SMMT warns the decline could be more severe if the crisis lasts for several months and factories are unable to restart production.

Clearly, Britain’s automotive sector is not alone in feeling the impact of the pandemic. Volkswagen says it’s currently spending around $2bn a week but selling no cars in any market other than China. It’s already considering job losses across its 670,000-strong global workforce, with 72 factories in Europe currently closed. VW does report improvements in demand in China, where authorities have felt able to relax some of the restrictions as Covid-19 cases have slowed, though production is currently only at half the pre-crisis levels.

Across Europe as a whole, the automotive sector has now laid off or reduced the hours of 1 million workers. The European Automobile Manufacturers' Association, which represents 16 major car and truck manufacturers, reports average production closures of 16 days, the equivalent of a capacity loss of 1.2 million vehicles. McKinsey is now forecasting a 30% decline in revenues for the global automotive sector this year, which would be a more severe recession than the downturn endured in the wake of the global financial crisis.

Amid the gloom, it’s worth pointing out that the automotive sector is doing its best to contribute to the response to Covid-19. The F1 Mercedes team has helped University College London engineers and clinicians at UCLH to develop a breathing aid that should mean fewer patients with the virus end up in intensive care. The Brackley-based team has contributed to the rapid development of continuous positive airway pressure (Cpap) devices, with 100 to be delivered to UCLH for clinical trials.

 

Manufacturing data begins to tumble

More broadly, the effects of the pandemic on manufacturing are now beginning to show up in sector data. The IHS/Markit Purchasing Managers Index, based on a survey of business leaders in the sector, fell to 47.8 in March, a three-month low and down from 51.7 in February. Any reading below 50 indicates a majority of respondents have experienced a contraction in activity.

Given that the UK government’s response to Covid-19 did not accelerate until the second half of the month, with the Prime Minister introducing lockdown measures on 23 March, April’s figures are likely to be significantly worse. Manufacturers across the UK are now focused on liquidity and very careful cash flow management. Several listed engineering companies have now announced they are cancelling planned dividends in order to conserve cash and we expect more to follow this example.

The experience of manufacturers in the UK mirrors that of their counterparts in other parts of the world. Factory activity contracted across most of Asia in March as the pandemic paralysed supply chains. Significant falls in activity in Japan and South Korea overshadowed a modest improvement in China. With the number of countries around the world imposing their own lockdown regimes, we now expect the impact of the pandemic on global supply chains to be more enduring than many originally expected.

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