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Europe Faces Biggest Threat From Coronavirus

Europe Faces Biggest Threat From Coronavirus.

“The auto industry is much better prepared than for the 2008-2009 recession, with ample liquidity, more manageable cost structures, more efficient automotive supply chains and a focus on earning returns”

Europe’s auto industry will be the hardest hit by the coronavirus crisis, but sales loss projections are being scaled back a bit from the highs of over minus 30% of last month.

“Europe will be the worst performing region in 2020 with a decline of 20.1%,” said Fitch Solutions Country Risk & Industry Research in a report.

This compares with a forecast of down 18.4% for China and down 18.5% for the U.S. and Canada. 

And while the finances of the carmakers will suffer, those with the best electric car portfolio will suffer least, or at least get some relief.

Late last month LMC Automotive was forecasting a 25% drop in European sales to 15.5 million cars and SUVs for 2020, while consultants Alix Partners earlier predicted a 32% fall. Over a month ago Moody’s Investors Service plumped for down 30%.

And now Moody’s has a positive stance on the industry’s prospects. The ratings agency recently downgraded nine of 22 global auto makers covering $130 billion of debt reflecting the fallout of the global pandemic, but had this positive comment.

“The automakers whose ratings were recently downgraded already faced major operational or competitive challenges and the recession likely will exacerbate these existing weaknesses,” said Bruce Clark, a Moody’s Senior Vice President.

“Nevertheless, the auto industry as a whole is much better prepared for this downturn than it was for the last one (after the 2008-2009 recession), with ample liquidity, more manageable cost structures, more efficient automotive supply chains and a focus on earning returns on capital.”

Sticking with minus 25%
LMC is sticking with its minus 25% projection for Europe, despite various incentive schemes announced by various governments. Top electric car makers will get a boost.

“Europe is set to witness a 25% drop in sales compared with 2019, taking account of announced incentive and scrappage schemes proposed by governments. Manufacturers producing the largest range of BEVs (battery electric vehicles) like VW and Groupe PSA, are well positioned to take advantage of any resulting demand increases,” LMC said.

GlobalData is close to LMC’s projection, but points out the downturn is of a much higher order than the fallout from the 2008-2009 recession, after reminding us Europe’s sales in May dived 57.2% compared with the previous year.

“However, lockdowns eased in May and we anticipate gradual improvement to new car demand in the region over the rest of the year, particularly as purchase and scrappage incentives come into play in major markets such as France, Italy and Spain,” said GlobalData analyst David Leggett.

“Nevertheless, GlobalData forecasts that the European light vehicle market will turn out down 23.2% this year at 15.8 million units. That’s a much bigger drop than occurred during the international financial crisis of a decade ago,” Leggett said.

Investment bank UBS also likes the look of VW and PSA stocks.

“VW and PSA stand out as stocks with the highest re-rating potential and headroom for positive earnings and FCF (free cash flow) surprises. Further, we think VW is likely to be rewarded by the market for its aggressive EV strategy, being the #1 beneficiary from EU green

stimulus,” UBS said in a report. 

It might seem hard to believe but just over 3 months ago forecasters were hoping auto sales in Europe might slip only about 5% in 2020, but as the virus impact accelerated shutdowns, forecasters have been slashing forecasts, but have relented a little latterly.


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