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COVID Effect Automotive Suppliers - 2020. Nov. update

Updated: Dec 17, 2020

Automotive industry output has been better than expected in the past 3 months, but due to the temporary nature stimuli, the glass is still half empty rather than half full

According to an analysis by Top Tier Consultants, the fall in vehicle sales in 2020 was spectacularly much deeper than during the 2008-09 Great Recession, but the rebound was also faster. In the past 3 months, global vehicle sales have matched that of the 2019 level. It did so in a way that neither China, nor the U.S., nor Europe individually reached its maximum this year in September, yet the overall result is the highest sales so far.

Higher-than-expected sales numbers have raised analysts ’consensus for a “ V ”-shaped recovery, but we may have swung too far to the high side of reality because there are significant negative risks to be reckoned with. Negative risks can be divided into two groups.

  • First, the “V” -shaped scenario assumes that COVID vaccination will be widely available in the second quarter of 2021 and also assumes that due to the second wave of the virus there will be no more lockdown in any major market.

  • The other group of negative risks is that the “V”-shaped recovery of the last 3 months has been supported by temporary effects and measures in all three major markets. In all markets that pent up demand supported increased sales, in addition to that, the U.S. temporary labor market stimulus generated higher disposable income especially among low-income earners (unemployment benefits combined with a one-time cheque distribution), but this will tun out out in the fourth quarter. The Chinese tax cuts are also temporary, and in Europe also the cash for clunkers programs.

Measures that underpin the market only temporarily brings the prospect of a „W”-shaped recovery closer

For the abovementioned reasons, we revised the European forecasts of Top Tier Consultants in a positive direction, but in a more conservative way than the analysts’ consensus. We believe that instead of the 28% YOY market decline for this year (forecast provided in May 2020), we can expect “only” a 24% lower output in Europe in 2020. This decline in absolute terms is still very large, more than twice as much as it was in the Great Recession 10 years ago. In addition, we expect in 2021 that we will still be 15% below the 2019 production levels. The 2019 level will not be reached until 2022 at the earliest, possibly in 2023.

Besides understanding how much the European average is forecasted to decline, it is important for Suppliers to foresee how demand is expected to develop by carmaker and market segment relative to the average, as there may be significant differences.

The medium-term outlook is fundamentally determined by the carmaker’s footprint and the age of its products, making the outlook for manufacturers active in Southern Europe or India significantly worse, while those with exposure to China are doing much better. The trend continues that the share of SUVs is increasing at the expense of the car and MPV segments, and sales of pickup trucks are also increasing with increased construction and renovations. During the pandemic, cars are less of a status symbol when fewer people are seeing them and less use is contributing to the premium segment’s temporarily shrinking at the time of COVID, which is why Daimler and BMW are not expected to reach 2019 levels before 2023. According to the fuel type major gains are expected of externally chargeable electric vehicles, further boosted in Europe by cash for clunkers programs. Interestingly, we expect the biggest growth at the two extremes of electrification, on the one hand for fully electric cars without internal combustion engines, and on the other hand for micro-hybrids, which are cost-effective to reduce a few grams of CO2 emissions. In contrast, full-hybrid technology is too expensive in terms of CO2 savings, and hybrid cars that can also be charged externally (PHEV) are supported by many new product introductions and will represent a milestone in a transition to full electrification. According to buyer types, as a result of rising unemployment, the share of private customers is declining compared to fleet customers who renew their fleet on a scheduled basis.

The COVID crisis will bring permanent gains to electric cars in Europe, but the premium segment is to shrink temporarily

In our previous article, in April 2020, we estimated that between 20 and 30 of Hungary's automotive suppliers were at risk of bankruptcy. The Top Tier Consultants Supplier Database contains the financial and efficiency data of the largest 250 Hungarian automotive suppliers. Smaller companies within the database are already SME’s which a turnover of less than HUF 2.5 billion (EUR 7m). 141 of the Top-250 companies are SME’s, of which, based on our in-depth analysis, 30 companies are at risk of bankruptcy with an uncertain future. There is a marked difference between companies in the SME sector with a turnover of less than HUF 5 billion (EUR 14m) and those larger than them. The smallest companies are in a much more difficult position, with almost one in three of them in the dangerous category: they had below-average indicators even going into the COVID crisis in 2019 and the indicators are deteriorating further as a result of the pandemic. These 30 suppliers have a total sales revenue of HUF 153 billion (EUR 437 m) and 7,000 employees. The Top Tier Consultants' job loss forecast did not change since April 2020 when a range of 5-10 thousand job losses were provided.

One logical, but not exactly anticipated consequences of the COVID situation is the dramatic deterioration in Customer-Supplier communication. The basic processes are well defined, many of which have already been digitized, for example by digital price lists updated monthly, or by digital purchase orders. At the same time, face-to-face encounters have largely been eliminated, which also reduces the transfer of knowledge from a typically larger customers to an SME Supplier. What’s more, even the SME Suppliers in our best category can’t plan for more than 3 months in the current situation in which they need help. This need not happen since carmakers in Europe have a legal obligation to report the life cycle of their products in great detail:

- By vehicle production location in 54 categories (platform, program, weight, segment, etc.)

- By vehicle sales by market in 29 categories (platform, model, drive, size, etc.)

- By powertrain production in 94 categories (engine, model, configuration, displacement, etc.)

One in three of the smallest SME Suppliers are in danger of bankruptcy if the COVID crisis deepens

Detailed forecasts of OEM’s are provided not just to the authorities, but to direct Tier-1 Suppliers too, and is available from market research firms and industry experts such as Top Tier Consultants. During the pandemic, due to reduced communication in the value chain, the forecast for the Tier-1 level became more uncertain, but the Tier-2-3 levels in the SME sector forecasts are almost completely lost beyond 3 months. However, while global suppliers can rely on independent databases, the same thing would be very costly for the SME sector, costing over HUF 10 million (EUR 29k) per company and per year. On the other hand, automotive industry associations could solve the planning challenge of their member that make up a total sales revenue of HUF 880 billion (EUR 2.5 bn), covering the 141 SME Suppliers at a cost of HUF 30-40 million (EUR 100k). The solution to provide forecasting services is in the hands of automotive industry associations who could cost effectively bridge the apparent unpredictability of the COVID times to their members.

The solution to provide forecasting services is in the hands of automotive industry associations who could cost effectively


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