The rate of “cash burn” within automotive sector businesses will come under close scrutiny during the COVID-19 coronavirus lockdown, according to GlobalData.
The Automotive industry analyst said that as the lockdown persists in a UK new car market that is unlikely to surpass 1.7 million units in 2020, the decline in trading is set to become “even more vertiginous” and attract attention to the financial fortunes of OEMs, suppliers and car retailers.
David Leggett, Automotive Analyst at GlobalData, noted that yesterday’s new car registrations volume data, published by the Society of Motor Manufacturers and Traders (SMMT), showed “a steeper fall than we saw during the last financial crisis”, underlining the heavy impact on the automotive industry being wrought by the COVID-19 crisis.
Leggett added: "April will likely turn out to be a month of full lockdown in the UK, which would see an even more vertiginous decline year-on-year.
"Even assuming a recovery later in the year, net consumer spending will be well down on pre-crisis levels and the UK car market will struggle to reach 1.7 million units against previous expectations that it would turn out in excess of two million units.
"The severe slump to demand means huge challenges ahead for vehicle manufacturers and suppliers who are struggling with cash flow while the crisis persists, with plants shut and the new vehicle market seized up.
"Company cash positions and rates of burn will come under increasing scrutiny in the coming months."
Car retailers urged to stand firm
In a webinar last week, ASE Global’s chairman Mike Jones said dealers should maintain or increase dialogue with their banks and funders during the current crisis, adding: “We should be planning for the future, looking at what the cash position will be, to tell them about potential problems and have plans A, B and C ready.”
He said dealers can be building a pipeline, to get arranged for a fast start when showrooms open again.
Historically, after other crises, new car sales and service bookings once recovery begins can lag slightly but used car sales build quickly, he said.
Jones also advised all dealers to “steer clear” from cashing out of stock if possible.
“The one thing people shouldn’t be doing is panic selling,” he said. “It’s very difficult from a cashflow point of view, but there is no market out there from a demand point of view, so if people are looking to liquidate stock it’s a phenomenally difficult time to do that.”
COVID-19’s impact on EV sales
GlobalData’s recent analysis of the impact of the coronavirus outbreak extended into the potential setbacks that ever lower fuel prices could have on car buyers’ desire to buy and electric vehicle (EV) once the market is up and running once more.
Car manufacturers have been keen to drive alternative fuel vehicle (AFV) sales in 2020 as an influx of new models reaches showrooms in time to mitigate the impact of new EU emissions regulations which can result in stringent fines.
But GlobalData said that the COVID-19 crisis could reduce EV demand and impair EU efforts to significantly reduce average new vehicle CO2 emissions.
Mike Vousden, Automotive Analyst at GlobalData, said: “GlobalData’s analysis suggests that low oil prices will lead to a longer waits for the reduced fuel costs offered by electric vehicles (EVs) to amortize their higher purchase prices.
"This could prove very problematic for the industry in a year that was supposed to mark the big shift to EVs to reduce fleet CO2 emissions in line with new tighter EU CO2 targets.”
EVs typically cost more than an equivalent internal-combustion-engined (ICE) vehicle but their lower running costs reduce that price differential over time and, in the longer term, end up costing less overall than their ICE counterparts.
However, the amount of time taken to make up that price differential depends on the cost of fuel.
Higher prices at the pumps mean EVs make up their extra purchase cost sooner, GlobalData observed, while lower fuel prices see ICE cars remain cheaper than EVs for longer.
Vouden said: "Much lower pump prices for gasoline and diesel have been ushered in by the COVID-19 crisis and a big hit to global oil demand.
“If pump prices are low in the long-term this will throw into question the economic case for users switching to electric vehicles.
"In the long run, this could see fewer motorists switching to EVs, putting the government’s ambitious targets for electrification at risk and potentially bringing increased fines for the vehicle manufacturers not complying with EU fleet average CO2 targets."