Pandemic Hits Carmakers, but Glimmers of Hope Remain
For General Motors, the Path to Reopening is Unclear
As the coronavirus pandemic presses on, American automakers are finding themselves in need of extra liquidity. For over a month now, auto plants and dealerships have been closed across the country. Demand for new cars is also down, as money is tight in most households and Americans are driving much less than usual.
Amid plant closures and shifting demand, General Motors (GM) announced on Monday that in an effort to retain liquidity, it will put a hold on stock buybacks and quarterly dividends this year. GM is not alone. A month ago, Ford (F) also paused buybacks and dividends.
It’s not clear when exactly American automakers will restart production. While Fiat Chrysler (FCAU) plans to reopen plants in the next week, there has been no news about when GM or Ford could begin making cars again. All three companies are working with the United Auto Workers Union to decide when it will be best to reopen. Last week, however, union leaders said they are not comfortable with an early May start to production.
Carmakers Face Uncertainty
The coronavirus pandemic and its economic impact may have been unexpected, but some investors were skeptical of the auto industry even before coronavirus complications set in.
Large automakers have long been under pressure to modernize and become more environmentally friendly. Now, that pressure is heightened. A few weeks ago, Ford (F) raised $8 billion in debt. The interest rates of 8.5-9.6% on that debt make it clear that investors feel wary of the future of combustion engine manufacturing. Meanwhile, Tesla (TSLA) shares have shot up by 64% this year, signaling that investors are more optimistic about the future of electric cars.
Demand for cars has crashed during the past months. It could take time for it to rise again after the pandemic if working from home becomes more normalized and fewer people are commuting. In China, there are still 57% fewer cars on the road than there were before the coronavirus hit.
Additionally, car companies also often serve as lenders, but as the economy shrinks, lending relationships could suffer. General Motors (GM) shows signs of bracing for those defaults. The company has made $1.95 billion in credit available to its lending division, GM Financial.
Up Next for the Auto Industry
Some analysts have noted that this could be a good time for the auto industry to take the lead on redesigning factory layouts to keep workers safe from the spread of infections. They may also use this uncertain time to pivot to more environmentally friendly technologies.
It is hard to know what will come after the pandemic, and that’s just as true for the auto industry as it is for any other sector. In Wuhan, once the center of the coronavirus pandemic, car sales in early April were surprisingly strong. Sales around China fell by 96% while the pandemic was at its peak, but they have slowly trickled back as restrictions have eased.
Americans may have to wait for some time to see a rebound in car sales, but China’s post-pandemic auto boom can at least serve as a glimmer of hope for what could happen down the road.
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