We have seen how the novel coronavirus outbreak, which began to emerge in China around end December 2019, quickly spread across the world, adversely affecting majority of industries. The global automotive industry was one of those hugely impacted by the lockdown regulations imposed by governments.
Major manufacturers either totally shut down production or brought down production drastically with minimal staff in order to follow social distancing and no-gathering norms. Small & medium sized businesses in this sector were particularly affected, given their limited resources as compared to big players. This had a domino effect on the workforce as well, with numerous employees laid off or furloughed.
Moreover, with supply of parts coming in from various parts of the world, coronavirus-led travel and import restrictions disrupted the supply chain. This apart, with people confined to their homes, automobile sales fell sharply. Per Meticulous Research, reported by Globe Newswire in May, sales declined approximately by 5.7 billion USD in the wake of COVID-19. Further, the research firm estimates that the crisis will lead to a 12%–15% dip in market this year.
Per a study by DesRosiers Automotive Consultants reported by Bloomberg in April, Canadian auto sales plunged 48% year over year in March, indicating the level of impact on the automotive sector in Canada, with only 95,000 units sold. This was notably the largest decline since 1997. However, auto workers are slowly returning to work in Ontario, despite health and safety concerns.
Coronavirus Impacts on M&A Activities: How will the auto sector be impacted?
The COVID-19 outbreak emerged at an already chaotic time in the global automotive industry, with suppliers and automakers scrambling to forge ahead in electrification, autonomy and connectedness of vehicles. The pandemic has only added to the uncertainty, prompting automotive companies to prioritize their liquidity and balance sheets over spending on mergers and acquisitions.
It is important to note here how this has affected the confidence of businesses and sentiments of investors. During the 2008 recession, which lasted until 2009, small and medium sized automakers were forced to declare bankruptcy because they were not bailed out like a handful of major players were. Naturally, the same is being anticipated this time around as well.
Moreover, sales of vehicles are not likely to increase and get back to its normal levels anytime soon, as the pandemic has created a financial uncertainty, preventing consumers to indulge in discretionary spending, which includes buying cars or travelling. This trend is expected to continue for an uncertain amount of time, and is anticipated to keep the automotive sector under pressure.
However, there is a silver lining here for SMBs. Per David Leggett, automotive analyst at analytics company GlobalData, opines, “Combining operations creates the opportunity to look for further efficiencies and reduce cost at a time when the industry is having to endure an exceptionally tough business environment.”
Additionally, for automotive companies with strong balance sheets and ample liquidity, the coronavirus-related disruption could offer an opportunity to add new capabilities to their portfolio, or tap into new markets through M&As. The recent confirmation that stalwarts Fiat Chrysler and PSA are going ahead with their $50 billion merger comes as a welcome news for the sector. The companies estimate that the merger would lead to a cost-saving of around 3.7 billion euros. This is expected to give an impetus to M&A activities in the automotive space globally, possibly making it a good time for small and medium sized manufacturers or other automotive-related businesses, that are looking for a buyer, to pitch. Improvement in M&A activities might lead to consolidation of smaller struggling businesses with bigger players.