{"id":8327,"date":"2020-04-21T09:01:14","date_gmt":"2020-04-21T16:01:14","guid":{"rendered":"https:\/\/blog-prod.qad.com\/blog\/?p=8327"},"modified":"2020-04-21T16:15:22","modified_gmt":"2020-04-21T23:15:22","slug":"covid-19-immediate-impact-automotive-supplier-industry","status":"publish","type":"post","link":"https:\/\/www.qad.com\/blog\/2020\/04\/covid-19-immediate-impact-automotive-supplier-industry","title":{"rendered":"COVID-19\u2019s Immediate Impact on the Automotive Supplier Industry"},"content":{"rendered":"

[vc_row][vc_column][vc_single_image image=”8328″ img_size=”full”][vc_column_text]The onset of COVID-19 arrived at a time when the global automotive industry was already in a state of tumult, with suppliers and automakers looking at a future defined by electrification, autonomy and connectedness. This pandemic has sent the entire automotive industry into a <\/span>state of uncertainty<\/span><\/a>, prompting automotive companies worldwide to take drastic actions to bolster balance sheets and maintain financial and strategic flexibility. What\u2019s more, during the great recession of 2007-09, only major automakers like GM and Chrysler got bailouts \u2013 this time, many expect suppliers will once again be denied bailouts and be forced into declaring bankruptcy.<\/span><\/p>\n

Quarantine Measures Halt Supplier Production<\/span><\/h2>\n

According to LMC – globally, production is now forecasted to drop to 76.9 million units in 2020, down 13.8% from a pre-pandemic forecast of 89.2 million; global production in 2019 was 88.9 million units. <\/span>We can expect this to drop again significantly in April as a result of the complete halt of North American and European production.<\/span><\/p>\n

If we use North America as an example of what is happening globally, many suppliers in North America were forced to halt production in March due to quarantine measures. <\/span>As a result, the seasonally adjusted annual rate (<\/span>SAAR<\/span>) for automotive production has dropped to 11.4 million annual units (from more than 16 million), the lowest since 2010. Furthermore, t<\/span>otal unit sales declined 38% Year over Year (YOY) in March.<\/span> With current shelter-in-place orders, I expect sub-10 million SAAR results in April.<\/span><\/p>\n

Before the global pandemic, the economic environment was strong; however, the <\/span>coronavirus pandemic<\/span><\/a> is creating a broad swath of unemployment. Furthermore, with no real end in sight to shutdowns and shelter-in-place orders, the recovery process will be both slow and unpredictable.<\/span><\/p>\n

Automotive Companies are Taking Action<\/span><\/h2>\n

All organizations are now taking actions to conserve cash, including slowing capital expenditures, drawing down working capital, along with salary reductions, lay-offs, unpaid furloughs, and bonus eliminations. The gravity of the situation is clear as several automotive companies have already started to dip into their revolvers (revolving credit) to be able to pay on-going obligations. Companies who have notably done so include Ford, GM, Fiat Chrysler, American Axle, Lear and Delphi Technologies.<\/span><\/p>\n

Some companies, like Ford, Aptiv and Lear, have also suspended capital allocation activities such as CAPEX, dividends, Mergers and Acquisitions (M&A), etc. All middle-market private company M&A deals have stopped since the market is too uncertain to negotiate favorable terms. The only deals that are proceeding are ones with severe liquidity issues.<\/span><\/p>\n

A few <\/span>major M&A deals<\/span><\/a>, such as Borg Warner and Delphi Technologies, will be challenged by the circumstances of the pandemic. I expect this could be foreshadowing of friction ahead for higher-profile deals, like the highly anticipated FCA-PSA merger set to close later this year. However, these deals are key examples of the <\/span>mega-mergers<\/span><\/a> and industry consolidations that I expect to accelerate going forward as the industry addresses broader structural issues associated with technology disruption. Consider this: in 2019, automotive OEMs announced more than 65,000 layoffs globally, citing technology disruption associated with vehicle electrification and digitalization of the business. These mega-mergers started in 2020 planning to address these structural issues, and then COVID-19 hit.<\/span><\/p>\n

The Borg Warner and Delphi Technologies Deal is One to Watch<\/span><\/h2>\n

The deal between Borg Warner and Delphi is a perfect example of the kind of ongoing stress these mega-mergers have been put under. With the chaos of the pandemic hitting hard, Delphi has struggled recently to meet expectations; the industry shutdowns have created a liquidity issue for the organization. To offset this problem, Delphi drew down its $500 million revolver \u2013 without consent from Borg Warner, the other party in its pending merger. The decision to tap into this credit is a violation of the terms to the agreement between the two parties.<\/span><\/p>\n

Some parts of the Delphi business, such as its Chinese branch, have started to improve with returns to full production. This will be a source of positive cash flow, but actions to conserve cash, including slowing capital expenditures, drawing down working capital, and compensation (salary reductions, layoffs, and bonus elimination) are critical at this time.<\/span><\/p>\n

The good news is that both companies are continuing to work through integration planning and still see the merits of putting the companies together. There are a lot of strategic merits to the deal, and both organizations will be served positively for finding an equitable solution, especially amid a global pandemic.<\/span><\/p>\n

This Time is Different for Automotive Suppliers<\/span><\/h2>\n

The simple fact that automotive suppliers are already drawing from credit revolvers so early into the shutdown is not a good sign of health. Consider this: the automotive industry has stopped production. No product is being produced. However, suppliers are still collecting on receivables for invoices that were submitted before the crisis began. Most OEMs have suppliers on 60-day terms, which means that suppliers will only be able to pay salaries, fixed costs, debt, etc. until all receivables are collected.<\/span><\/p>\n

Now let\u2019s assume that the North American and European industries start back up May 4. By this time, most companies will have exhausted most of their receivables. As the organizations ramp up production again, they will have to pay employees, suppliers, cover fixed costs, debt, etc. and ultimately will not have any income for another 60 days. How will these companies cover the costs associated with the potential ramp-up while avoiding liquidity problems and bankruptcy?<\/span><\/p>\n

\u00a0<\/span>Things are only going to get tougher. As organizations start to flirt with this danger, the supply chain will take action to <\/span>adapt to the disruption<\/span><\/a>. For instance, electronics companies that import circuit boards from Asia are already being forced into new terms from Net-75 days to Net-0 or FOB China. When and if the situation gets to this point for suppliers, all the existing problems will begin to compound.<\/span><\/p>\n

Some Suppliers are More At-Risk than Others<\/span><\/h2>\n

The COVID-19 economy presents the biggest challenges to high leverage companies like American Axle. In a downturn like this, American Axle and other companies that have debt that needs to be supported will only add to the cash drain.<\/span><\/p>\n

Furthermore, organizations like American Axle, Nexteer, Dana, and Lear have very detailed union agreements that protect labor and ensure that workers will receive comparable pay after collecting unemployment. With no cash flow through March and April at the very minimum, these suppliers will be at serious risk for bankruptcy.<\/span><\/p>\n

These suppliers have far less flexibility to deal with the situation than suppliers like Magna and Borg Warner. Both have <\/span>flexible supply chains<\/span><\/a> which generate strong cash flows, have limited debt and few union agreements.<\/span><\/p>\n

Bailouts for Automotive Suppliers are Unlikely<\/span><\/h2>\n

During the great recession of 2007-2009, a government bailout was only offered to the major automakers, and in the end, GM and Chrysler took the assistance. An option like this was never offered to suppliers, who were left to fend for themselves \u2013\u00a0many through bankruptcy.<\/span><\/p>\n

Today, the United States has a trillion-dollar stimulus package that is focused almost entirely on supporting smaller businesses with less than 500 employees. Not many suppliers have less than 500 employees. I expect that once again, suppliers will be overlooked in terms of federal assistance.<\/span><\/p>\n

What Can the Automotive Industry Expect in 2020?<\/span><\/h2>\n

Despite being a critical piece of the production of vehicles, <\/span>automotive<\/span><\/a> suppliers run the risk of being forced to take drastic measures. Without cash flow and foreseeable bailouts, suppliers with a lot of debt have essentially been set adrift. I expect that many of them will declare bankruptcy by the summer of 2020. Suppliers will be forced to demonstrate their investment worth and longevity to both their banks and their investors \u2013 and only those who do this well, and quickly, will come out of this crisis with their businesses intact.<\/span>[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column][\/vc_column][\/vc_row]<\/p>\n","protected":false},"excerpt":{"rendered":"

[vc_row][vc_column][vc_single_image image=”8328″ img_size=”full”][vc_column_text]The onset of COVID-19 arrived at a time when the global automotive industry was already in a state of tumult, with suppliers and automakers looking at a future defined by electrification, autonomy and connectedness. This pandemic has sent the entire automotive industry into a state of uncertainty, prompting automotive companies worldwide to take […]<\/p>\n","protected":false},"author":60,"featured_media":8328,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[182,199],"tags":[7,448,1180,1168,1169,507,24,1170,1078,359,777,692],"class_list":["post-8327","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-featured","category-manufacturing-trends","tag-automotive","tag-automotive-supplier","tag-bailouts","tag-coronavirus","tag-covid-19","tag-economy","tag-manufacturing","tag-pandemic","tag-production","tag-risk","tag-suppliers","tag-uncertainty"],"yoast_head":"\nCOVID-19\u2019s Immediate Impact on the Automotive Supplier Industry | QAD Blog<\/title>\n<meta name=\"description\" content=\"What can the automotive industry expect in 2020 in the midst of COVID-19 quarantine shutting 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