Automotive Manufacturing & Parts Trends
COVID-19 Industry Brief
EFFECTS OF THE CORONAVIRUS ON THE AUTOMOTIVE – ORIGINAL EQUIPMENT MANUFACTURERS INDUSTRY Updated April 11, 2020
- COVID-19 Impacts: The coronavirus pandemic has had a significant impact on automotive production and demand. Although U.S. sales were strong through February 2020, they dropped approximately 35 percent (seasonally adjusted) in March 2020 over last year, representing the sharpest year over-year-decline since the financial crisis. Several worldwide automotive production forecasts for 2020 have already been dialed back by 5 to 10 percent based on the early reads on the impact of the pandemic on consumer spending habits. The Conference Board’s Consumer Confidence Survey® declined sharply in March, following an increase in February. Lynn Franco, senior director of economic indicators at The Conference Board stated: “March’s decline in confidence is more in line with a severe contraction – rather than a temporary shock – and further declines are sure to follow.”
- Production Curtailment: Manufacturers throughout the world and in particular North America have been closing plants and curtailing production in reaction to coronavirus safety concerns as well as demand forecasts and supply chain issues. In North America, the Big 3 automakers and others closed their North American assembly plants for two weeks beginning in March. Both Ford and Toyota announced extensions of their closures through mid-April, with Toyota recently extending to early May.
- Demand Outlook Weakening: Despite lower interest rates, faltering consumer confidence, nonessential business closures, and stay-at-home orders will reduce automotive demand and production in the second quarter of 2020 and likely beyond. According to a blog post by KPMG, automotive production will not restart until the third quarter: “The ongoing spread and different reaction to the coronavirus in Europe will delay economic restart, despite the ongoing, slow Chinese economic restart. Existing market vulnerabilities (e.g., trade tensions, declining sales) are likely to persist into the third quarter given tight inventories (fewer than 6 weeks) and complex supply chains.” While other forecasts are not so dire, it is clear this is going to have a major impact on sales levels. The latest projections from Edmunds estimate that annual sales levels in North America will decline by 35.5 percent in 2020, adding that sales in the third week of March had fallen by 80 percent as compared to 2019.
- Impact on Merger and Acquisition: The pandemic is also affecting merger and acquisition activity with the Wall Street Journal announcing that BorgWarner Inc.’s planned acquisition of powertrain company Delphi Technologies PLC is at risk.
- Valuation Outlook
- Inventory: From an inventory value perspective, there have not been any automotive models or lines discontinued to date, so while Gordon Brothers would expect a short-term impact to sales at Tier 1 and lower suppliers, once production resumes, inventory valuations for active product should not be impacted. Any excess product would be impacted, and if a model is discontinued or order forecasts are adjusted, that inventory could also be impacted.
- Machinery: Machinery and equipment values will be lower on a go-forward basis. The secondary market functioned through the first half of March with many sales going to online forums; however, the second half of the month saw a significant number of auction events cancelled or postponed. In the first week of April 2020, Gordon Brothers noted 21 postponed and cancelled industrial auctions. When non-essential business closures and stay-at-home orders are rolled back, Gordon Brothers expects the secondary market to resume near-normal functions; however, there will be a high level of dealer inventory to work through and likely more equipment coming to market due to plant closures and consolidation as a result of lower sales as production forecasts are revised lower in the second quarter and possibly beyond. Gordon Brothers noted that some sales of dealer equipment in March offered higher-than-normal discounts.
Date May 2019
- Strong light vehicle sales for March 2019, up 1.1%, were offset by declining sales in April, down 5.0%, resulting in lower year-to-date totals over 2018
- Values for large-tonnage stamping presses have decreased slightly during the past 12 months
- Momentum for electric vehicles has also stalled due to lower oil prices
Gordon Brothers by the numbers
Industry snapshot: The automotive industry is a mature market experiencing declining demand. The post-recession industry has adapted to a wide variety of changes including, but not limited to, government bailouts, environmental initiatives, government legislation, and the appreciating U.S. dollar. After seven straight years of increases, domestic light auto sales dipped 1.9 percent in 2017. While 2018 saw a slight increase in sales of 1.1 percent, 2019 year-to-date sales reflect a decrease of 3.5 percent. After a slow start to the year, U.S. sales increased over last year in the month of March 2019; however, April 2019 sales were disappointing, declining 5.0 percent over last year. In total, U.S. vehicle unit sales were down 1.9 percent through the end of April over the same period last year.
Momentum for electric vehicles has also stalled due to continued lower oil prices. Tesla Inc. reported a loss of $700 million for the first quarter of 2019 but predicted it would return to profitability in the third quarter as it cuts costs and improves deliveries after facing issues ramping up shipments outside the United States. Despite the boost in domestic light vehicle sales for March, the overall auto industry is currently projected to decline in 2019. U.S. automakers are projected to sell 16.9 million light vehicles in 2019 as compared to 17.3 million units sold in 2018.
Mixed supplier results as sales drop: Earnings for first-quarter 2019 for Tier 1 suppliers were mixed, as several have announced reduced net income and lowered their 2019 outlooks. Bosch issued a warning that 2019 sales will stagnate in the face of a slowdown in the global economy, continuing trade disputes, and, in Europe, the effects of Brexit. Companies including 3M, Rockwell Automation, and Visteon have all reported that their 2019 earnings will be lower than they had predicted, in addition to reporting weaker results than Wall Street had expected.
To meet complex original equipment manufacturer (OEM) requirements and tighter production schedules, automotive suppliers are expanding and investing in operations. In May 2019, Tier 1 supplier DaikyoNishikawa U.S. announced plans to invest $110 million to open an auto parts manufacturing facility to serve the Mazda Toyota Manufacturing U.S.A. assembly plant now under construction in Huntsville, Alabama. German auto supplier Webasto announced in May 2019 that it is expanding its operations in Michigan by announcing plans to invest $48 million for a new 300,000–square-foot manufacturing facility in Plymouth Township after obtaining several contracts from Ford and Fiat Chrysler. These recent examples of expansion and investment are an indicator of a rapidly growing market for machinery used to manufacture automotive parts and assemblies.
Technological advances lead to increased efficiencies: Due to the historically labor-intensive nature of automotive production, technological changes are rapid, as companies look to reduce labor costs and increase overall efficiency. The late-model nature of the subject assets makes them more marketable, as they possess current technology and capacity and allow for OEMs to continue their focus on streamlining production processes, reducing labor requirements, and increasing efficiencies. This further allows the industry to increase revenue growth at higher rates than wage growth, which has largely been achieved over the last few years. With this industry picking up, many suppliers have also changed the way they finance their operations. The market is seeing companies take advantage of low interest rates and higher used machinery values to find competitive, affordable financing to expand operations.
Stamping press values mixed: Recent market research indicates that the market for stamping presses in general is stable to slightly down. Within the metal stamping machinery market there can be distinct value trends based on equipment specifications. As an example, in the current market, values for higher-tonnage machines (1,000+ ton capacities) are slightly depressed, as demand from the automotive segment, which drives a significant percentage of manufacturing demand for larger presses, is down relative to demand from 2011 through 2016. However, these values are still well above market lows from 2008 through 2011. While demand has fallen for these presses, there are very few of these available on the used market. Alternatively, current values for medium tonnage machines (100- to 400-ton capacities) are stronger, as that equipment is typically in higher demand for smaller, precision stamping piecework used in a variety of industries. In all press sizes, late model machines 10 years and newer are the most desirable, while those built prior to 1970 are less desirable.
Market for die cast equipment is stable: Industry participants report that there is currently a healthy balance of supply and demand for die casting equipment in the secondary marketplace. Late-model machines are selling well, particularly those with shot end and control advancements. Certain manufacturers, such as BuhlerPrince, are particularly desirable because used machines are not readily available and new machines are subject to long lead times. Older machines and machines in poorer condition are not as marketable. The most popular size machines are between 400- and 800-ton capacity. Machines with larger than 1,200-ton capacity require a longer market period due to a more limited user base. Lenders should discuss appropriate liquidation timeframes with appraisers for these sizes of machines.
The current market for die cast machines is for late-model or new equipment. Most buyers are currently looking for machines that are less than 10 years old. If the equipment is 15 years or older, the machinery is perceived as needing a rebuild. In these cases, users will take into account the cost of rebuild and compare that to the cost of a new machine.
Maintenance critical to maintaining value: The age, maintenance practices, and utilization of machinery are all key value considerations. Newer equipment is generally more desirable, as the market seeks the most modern technology. Maintenance practices are important as proper care can extend the useful life of equipment beyond what is normal and expected. Poor maintenance can shorten the life of machinery and lead to production issues. Utilization is important since a machine being run on a single shift will have a longer chronological life than a machine running multiple shifts. These multiple shifts increase the effective age and reduce the remaining life, thereby affecting value. Lenders should expect appraisers to consider these factors when estimating value.
Lenders should be wary of certain collateral: Custom assembly, sequencing, and single-purpose automotive production machinery is generally expensive to purchase due to high design and engineering costs. These machines will have very limited resale value unless sold to an end user making the exact same part. In liquidation scenarios, these machines generally only have component or scrap value. Other equipment with potential for limited value return includes painting equipment, part-specific test and measurement equipment, and installation-intensive equipment, which can be cost prohibitive to remove. Standard metalworking and plastics equipment, which remain common in many types of manufacturing, are typically widely marketable and represent good collateral.
Gordon Brothers is closely monitoring several key issues including the recent announcement by Ford to cut 10 percent of its white-collar workforce by August 2019 and GM’s previously announced closings of five plants in North America as well as white-collar layoffs in 2019. Also, the continuing effects related to import tariffs imposed by the Trump administration and any changes to state and federal regulations should be routinely monitored, as significant changes may impact future equipment values.