Auto Industry Forced to Hit Brakes
- Tesla forced to shut down Fremont factory
- UAW and Big Three reach agreement
- U.S. car sales will fall 9% in 2020, says Morgan Stanley
The COVID-19 outbreak is halting production and causing supply and demand shocks in the auto industry.
Tesla Inc. (TSLA) can only maintain minimum basic operations at its Fremont factory, according to local authorities who said it is not an essential business. “If Tesla was a hospital, if Tesla was a laundromat, if Tesla was a mechanic shop, we wouldn’t be having this conversation,” said Alameda County spokesman Sgt. Ray Kelly. This is a big blow to the electric car manufacturer after it remained open despite the “shelter in place” order. CEO Elon Musk had told his employees via email he would continue working but they are not obligated to show up. The news has sent the stock down almost 10% in pre-market trading on Wednesday.
In the north, the Big 3 Detroit automakers representing 44% of the U.S. auto industry in terms of sales – Ford Motor Co. (F), General Motors Co. (GM) and Fiat Chrysler Automobiles (FCAU) – have agreed to adopt new safety measures, including partial shutdowns, after hours of negotiations with United Auto Workers (UAW) representatives. The companies, all of which have employees infected with the coronavirus, rejected the demand for a two-week shutdown of operations. “All three companies have agreed to review and implement the rotating partial shutdown of facilities, extensive deep cleaning of facility and equipment between shifts, extended periods between shifts, and extensive plans to avoid member contact. They will be working on shift rotation to minimize risk,” said the UAW statement. “The companies have also agreed to work with us in Washington, D.C., on behalf of our members as we manage the disruption in the industry.”
European assembly plants of several firms like Daimler, Volkswagen, Renault, PSA Group, Fiat Chrysler and Ferrari have been shuttered temporarily. Glitzy auto shows offering hands-on experiences have been postponed. The global auto industry, in the middle of a slump and investing large sums for rapid technological changes, is facing both supply and demand shocks. China car sales fell 80% YOY in February. Supply chains, a large chunk of which are situated in China, have been disrupted as employees fall sick or cities are shutdown. Ford reportedly had to temporarily shut down its Chicago assembly plant Tuesday because of a shortage of parts.
The U.S. market has been relatively resilient as sales dipped globally, but this year Morgan Stanley expects U.S. demand for new cars to fall to 15.5 million from last year’s 17.1 million. LMC Automotive cut its 2020 forecast by 300,000 to 16.5 million. However, these companies are a long way from where they were during the 2008 financial crisis and have enough cash to burn. “We believe the automakers’ balance sheets are categorically in a strong position to absorb several months of a near shut-down… giving the market enough time to address other actions to either stimulate demand or to ensure openness of key capital markets,” wrote Morgan Stanley analyst Adam Jonas in a note on Tuesday.