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Auto sector faces biggest crisis in 13 years

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The automotive sector is facing its biggest challenge since the 2007-2009 financial crisis with 97 per cent of light vehicle (LV) manufacturing plants in Europe and North America temporarily shut down.

Already, key players in the sector are negotiating financial lifeline and joint venture transactions with firms in other sectors.

Indeed, some of West Africa’s major economies are going to face “significant headwinds” in the time ahead. There is some real economic pain coming.

These were the words of Managing Director, Deloitte emerging markets and Africa, Dr Martyn Davies while reacting to issues around the automotive sector in Africa.

Looking back to 2013, Nigeria was ratcheting up double-digit growth in new-vehicle sales, with a 20 per cent year-on-year increase and the market nudging at the 50 000-unit a year mark.

Fifty-thousand-units a year may not seem like much, but given a few years of compound growth, Nigeria could have presented an exciting new-vehicle market, says Davies.

However, then came July 2014, and the oil price collapsed from roughly $125 a barrel to $27 a barrel – much the same level as the current price.

“Within the space of a year, new-car sales in Nigeria declined from roughly 50 000 units a year to roughly 5 000 units,” he revealed.

“So, the key point here, as a historical example, is that the oil price decimated the new-car market six years ago.”

Davies says he expects much the same to happen, as there has been a lack of structural reform in oil-dependent economics, such as Angola and Nigeria, over the last six years.
“Nigeria remains a price-taking economy and, above all, consumer confidence in the market is dependent on the oil price.

“There is only one show in town in West Africa and that is oil. What is happening now is very bad news for the region.

“It is going to be difficult to grow a new-car industry when the economy is non-diversified, oil-dependent and consumers are under significant pressure.”

Davies is more optimistic – “subdued optimism would be the word” – about Ghana.

“They are doing all the right things. It’s impressive to see what the Ghana government is doing about setting the right policies and protective mechanisms in place to court global OEMs [original equipment manufacturers, or car makers], to spur on industrialisation.”

Previous policies such as ‘one village, one factory’ did not deliver huge success, but luring European and Japanese OEMs to set up factories in Ghana “may just move the needle”, says Davies.

“Ghana is policy agile, business-friendly and pragmatic.” East Africa is a very different story from West Africa, says Davies.

The fact that these countries do not have oil, has acted as a tailwind for growth.

“Roughly about a quarter of its import bill, similar to South Africa, is oil. Low oil prices are deflationary and encourage car use.

“This will stimulate growth in the new-vehicle market in Kenya – coronavirus aside. We don’t know yet how that will play out.”

Davies believes the Covid-19 pandemic will create a lack of consumers in East Africa with sufficient expendable income to buy a car.

A second impact will be governments’ response to the virus, which will typically play out as a shutdown to curb the spread of disease, which would act as a shock to the economy.

The third impact will be the loss of life.

Davies says there has already been a significant drop in the number of used vehicles arriving for sale in East Africa.

“This talk to a major drop in consumer spends and confidence, and this is not a supply-side issue from Asia, it is a demand-side issue in East Africa.”

Supply-side constraints will play more of a role in Morocco and South Africa, where vehicles are built for the global export markets, with a large number of parts sourced from abroad.

“Combined with Covid-19 and government shutdowns, this will cause disruptions in supply chains.”

In South Africa the effect of Covid-19 will be profound, says Davies.

“We are seeing a shutdown of the auto industry. So, seven per cent of our gross domestic product is literally shutting down. This is unprecedented.

“The impact will be severe. Vehicles are our single most valuable export, and the auto industry employs a significant number of people.

“We are seeing the demand side in our major export markets – Germany, the UK – drying up.

“I don’t know what the effect will be in numbers. How long will it take for the demand side to come back up? Who in the world is going to buy a new car in May, June? That is the trillion-dollar question.”

Indeed, the rapid spread of the coronavirus (COVID-19) caught the industry on the back foot.

Reviewing the development on Tuesday, Mike Vousden, Automotive Analyst at GlobalData, a leading data and analytics company, said: “With potential customers suddenly stuck in lockdown all around the world, some original equipment manufacturers (OEMs) may see months without meaningful sales volume and suffer a subsequent hit to revenue and profitability“.

According to him, automakers are bearing the financial burden of supporting furloughed workforces and, in some cases, repurposing factories and supply chains to provide much needed ventilators and medical equipment.

“These extreme circumstances have pushed some automakers to access sizeable credit facilities to shore up their financial positions.

Most recently, Japanese giant Toyota announced it was seeking a JPY1 trillion ($9 billion) line of credit from Sumitomo Mitsui Banking Corp. and MUFG Bank. Of all the major Japanese OEMs, Toyota is the largest and has the best credit rating – Moody’s Investors Service previously held it at an A1 grade – but, with the virus placing incredible pressure on the auto industry’s earnings, it has since dropped Toyota’s grade to Aa3.

“The fact that these huge business enterprises are seeking to open new credit lines at this stage in the crisis adds to its gravity and a growing sense that even when recovery arrives, the financial consequences will be felt for some time to come.”

Speaking in a similar vein, another expert, Calum MacRae, “In Europe and North America, GlobalData’s latest estimates show that some 2.5 million LVs have been removed from production schedules at a cost of $77.7bn in lost potential revenue – if it is assumed the stoppages last at least up until the end of April.

" This time, the threats are not the one-dimensional threat to demand precipitated by the financial crisis. Supply chains are affected and workforces are affected. It is challenging to manufacture vehicles and components without endangering a workforce. Safe manufacture, if possible, can only be achieved at a reduced capacity.”

Efforts to suppress the spread of the coronavirus (COVID-19), with social lockdowns widely implemented affecting 20 per cent of the global population, have decimated vehicle demand overnight.

MacRae added: “In response, 168 out of 173 LV manufacturing plants in Europe and North America have called a halt to operations for varying amounts of time during March and into April. Additionally, production stoppages are not limited to North America and Europe, the virus is roiling the industry from Detroit to Dusseldorf to Durban.”

“What’s more, the shocks will ripple through the supply chain with supplier plants also being furloughed. It really is an unprecedented crisis, the in terms of its speed and scale. The auto sector faces its biggest existential crisis since the financial crash and subsequent recession of 2007-09.”


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