At the start of 2020, the automotive industry appeared to be in a solid condition compared to oil and gas, retail, and aerospace. Although the economy was slowing and sales were projected to decline slightly in North America, with record low unemployment, record low interest rates, and low gas prices, the industry was focused on dealing with the disruption caused by the transformation to electric vehicles and automated vehicles.
The coronavirus crisis abruptly changed everything in ways that the industry has not experienced before. Unlike the Great Recession, the pandemic resulted in an immediate worldwide shut down across the entire world economy. Now, as various economies re-start, the industry, especially suppliers, face uncertainty in all aspects of their businesses.
Even the ability to re-start the industry is uneven and subject to change. While the OEM’s have announced proposed production resumption dates, these have been pushed out because of differing shutdown orders in the applicable facility locations. Moreover, because suppliers typically need to be running a week or so before their customers, even a firm date does not create an automatic up-and-running situation. In many cases, while a customer plant can legally open, its suppliers cannot (although the OEM’s may be telling them to). This is further complicated by the global just-in-time supply chains and the fact that the recovery from COVID‑19 is occurring unevenly throughout regions and, as of early May, some countries have yet to permit automotive facilities to open.
While COVID-19 caused a hard stop, it did so when the supply base was near or at capacity, unlike the Great Recession when there was significant excess capacity. Moreover, there is currently more available liquidity than existed in 2008-2010. As a result, it is likely that OEM’s and larger Tier I suppliers will support (with an expectation of repayment) key suppliers that were strong before COVID‑19 and will drive consolidation to preserve capacity.
Companies in the automotive industry will be facing these challenges while confronting uncertainty in terms of volumes and product mix with demand remaining as a huge question. There is already an excess of used vehicles, with more becoming available as rental agencies downsize their fleets. Additionally, how current market conditions impact the move to electric vehicles and autonomous vehicles is anybody’s guess. While the duration of this slump is also uncertain, it is becoming increasingly clear that it will be years before volumes return to the prior levels.
With decades of experience having representing hundreds of suppliers of all sizes in the Great Recession and in the rebound afterwards, McDonald Hopkins’ Business ReStart Task Force is will situated to assist suppliers in these most challenging and uncertain times, whether in employment issues, deciding whether to buy or sell the business, customer or supplier negotiations, refinancing or accessing capital or restructuring consensually or in court. Please do not hesitate to contact any of the attorneys listed below should you desire to discuss any of these or other issues.