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Moody’s: Coronavirus to have lasting effect on Auto Industry

Moody’s Investors Service released a new report on the global state of Auto Manufacturers and Parts Suppliers. The new report says Auto manufacturers and part suppliers globally will feel the effect of the Coronavirus pandemic long after it has passed.

“The coronavirus will have a lasting impact on auto makers’ supply chains, which will be more localized with required health & safety measures increasing operating costs and eroding efficiency long after the pandemic has passed. In addition, demand for electric vehicles is set to speed up thanks to the government stimulus packages, especially in Europe,” says Matthias Heck, Vice President – Senior Credit Officer at Moody’s Investors Service. “ Companies will also face higher capital spending for their move to more automation in their production lines.”

Emphasis on safety will add costs and reduce capacity

Safety measures that the auto industry implemented in the wake of the coronavirus outbreak will remain in place at factories, warehouses and dealerships long after the pandemic passes. Comprehensive measures such as social distancing requirements, temperature checks and the disinfecting of workspaces will increase operating costs and erode efficiency across the supply chain,
leading to reduced production capacity from pre-COVID levels. Companies will also seek to further automate production and distribution to minimize disruptions from future pandemics, which could lead to higher capital spending.

Supply chains will become more localized

The UK’s vote to exit the European Union and rising trade tensions between the US and its main trading partners had sparked a move to more regional supply chains in the auto industry. The coronavirus experience is likely to accelerate efforts to bring suppliers closer to automaker assembly lines. In addition, automakers will increasingly prefer to maintain a selection of suppliers for individual parts.

Electrification to accelerate

Government economic stimulus packages in Europe, Asia and, possibly, the US, will hasten the auto sector’s transition away from traditional combustion-engine vehicles to more electrified fleets. Offering sales incentives for electrified vehicles has the dual advantage of supporting a politically important manufacturing sector while also backing the implementation of stricter emissions regulations, which are unlikely to be eased. The European Union’s Green Deal and US Democratic Party presidential candidate Joe Biden’s $2 trillion climate plan illustrate how
demands to invest in cleaner technologies will remain on the political agenda.

Countervailing forces will affect consumer demand for cars

Consumer concerns about public transportation could enhance the appeal of commuting to work by car, positively impacting demand for new and used cars. But the demand-boosting benefits
of a shift to more private transportation could be offset by the demand-sapping effect of more people working from home and less business travel activity. This, in turn, could limit
overall demand for new cars by reducing average miles driven per year and extending the life of existing vehicles. The latter will be particularly beneficial for tire manufacturers,
which typically generate higher margins in the replacement market.

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