V-Shape, U-Shape, L-Shape?

Now that hopefully everyone has made the adjustments necessary to cope with the immediate effects of Covid shutdowns in terms of working arrangements, provisions for furloughed employees and continuation of services for essential workers, it is fair to think about the next stage – a return to work at some point in late Spring or early Summer.  There will be many uncertainties as nobody knows for sure how the upstream supply chains have been affected, nor how consumers will react to being allowed to use their cars again and go shopping.

These will influence the shape of the recovery, and its duration.  Commentators talk in terms of V, U and L-shaped recoveries, with the first referring to a quick bounceback, contained within 2020, and the latter something that looks more like the Global Financial Crisis with a slow recovery over a few years.  The Chinese market appears to be following a V-shape in terms of end markets.  Because of the constraints in flexing production volumes quickly, OEMs in China are forecasting a sales drop of around 10% this year in the absence of any national stimulus from the Government.  There appear to be differences by manufacturer and region.  Although CADA, the Chinese Dealer Association reported that almost 99% of all dealerships had reopened at the start of this month, showroom traffic was only two thirds of normal.  However, VW were more upbeat reporting near-normal showroom traffic and 32 out of 33 car and components plants back in production.  China CEO Stephan Wollenstein was quoted in Automotive News Europe China as saying that there was “a good chance that the Chinese car market could reach last year’s level in early Summer” – so a V-shaped recovery of around four months duration.  Still a hit for all players, but probably survivable for any business that was not already troubled.

Meanwhile, other commentators are pretty much ruling out a V-shape for Europe and North America.  Due to a range of factors including supply chain disruption and consumer nervousness about a second wave of infection, the consensus seems to be that there will be a period of lower activity throughout 2020 before some recovery in 2021.  A report from Fitch Solutions, reported in Forbes suggests that global demand would decline by up to 25% in 2020 overall, with the decline continuing in the first half of 2021, before the beginning of a recovery in the second half, generating a further overall decline of 10% in 2021.  This is echoed in an aftermarket-focused report from Roland Berger which agrees with this scenario for sales, whilst suggesting that aftermarket will decline by 5%-10% in 2020 and flat to 5% decline in 2021.  With European manufacturers hoping to restart production before the end of April, this scenario feels like the most probable, with the recovery held back mainly by consumer sentiment and the impact on savings and disposable income of furloughs and small business disruption.

The possibility of the L-shaped recovery should not be discounted however, particularly in markets which have been particularly hard hit.  Where financial support for those individuals and businesses affected has been less, or is delayed to the stage where it does not arrive in time to prevent a crisis, then this will lead to a significant lack of confidence and reduced economic activity.  Where the use of private leasing is low, existing owners have the easy option of just not going out shopping for another car.  Even a couple months delay in the normal buying cycle equates to over 15% reduction in the market if applied across the board.  As every day passes, it also seems that we learn more about what we don’t know about Covid, rather than progressively zero in on a precise understanding and the basis for treatment and immunisation.  That will also feed uncertainty about significant purchases.  The possibility of an L-shaped recovery is therefore real in my view, particularly for sales, and we should prepare for that as a Plan B.  It will only become apparent which scenario we are facing once people are free to resume their normal daily lives and are back at work, facing whatever the new normal is.

As an industry, we also need to plan now for the actions that might influence the outcome.  All the projections that I have seen are predicated on the basis of no exceptional support or intervention in the market.  There will be many requests from all sectors for help post-Covid lockdowns, and some will undoubtedly be about survival – for example from airlines (where Lufthansa anticipates it will “take years” to recover to 2019 volumes for example) and the hospitality sector.  We probably need to help ourselves, rather than count on Government aid.  ICDP is working on some ideas that might help do that – more later.

In the meantime, stay safe, stay well.