Detroit’s Big Three automakers are struggling to handle stock decline amid near-total factory closures in North America and Europe as the impact of coronavirus spreads across the market.
Ford Motor Company has ceased production in its Valencia plant for one week after three employees tested positive for COVID-19, kicking over 7,000 employees out of work as its stocks continue to fall.
Neal Ganguli, senior managing director at FTI Consulting, says that while this current pain period is not yet a repeat of 2008’s recession, it is still rocking the industry’s finances.
“In 2008, during that downturn, the automotive industry lost about 20 percent of its revenue for a period of time,” Ganguli continues. “That then led to supply recapitalisations in restructuring downstream in the value chain—a 20 to 25 percent revenue drop.”
Ganguli says that as the market was already approaching a difficult time, the entire automotive value chain will now see repercussions, spelling bad news for finance departments in both automotive and associated supply chains.
“The tier twos, the tier threes — they’re going to start feeling the pinch, and they may or may not have the healthiest balance sheets to begin with at this point,” Ganguili says.
“They may or may not have the ability to diversify out of being shut down by an OEM (original equipment manufacturer) plant or two.”
Stocks fall as pandemic closures continue
GM CEO Mary Barra has instructed any non-contract workers outside China to work from home, where able, halting production at several plants worldwide.
Following this announcement, GM shares fell from almost $25 to $21.50, settling below $18 by March 20. Broadcasted shareholder meetings have also been postponed and cancelled in the wake of these decisions.
These changes are also having international repercussions. Fiat Chrysler suspended production across most of its European manufacturing plants, after which its shares fell nearly 16 percent in Milan – meaning that the company’s stock has already lost 47 percent of its value this year.
“If we see that kind of shareholder value erosion, which are were already starting to see, and if this intensifies for a longer period of time, then I think that the chances of a deeper recession are pretty significant,” Ganguli says. “But, I will also say that in disruptions like this, there is a lot of reaction.”
The Bureau of Economic Analysis now estimates that in 2008, the GDP took an 8.4 percent hit; the GDP hit for 2020, on a global scale, is set to be much higher than that.
Between March 15 and 20, each of the Big Three’s stock has fluctuated downwards as the Dow Jones continues to close lower each day.
Ford Credit, the company’s lending arm, is offering new Ford buyers a 90-day delay on their first payments, while GM is offering zero percent interest rates on 84-month loans. However, these measures alone may not be enough to pull the companies out of pandemic-driven debt.
“There are disruptions to operations that OEMs are dealing with right now,” Ganguli says. “It could be supply shortages coming from suppliers not being able to ship parts, it could be because of the travel bans they can’t get the right kinds of teams at the right place at the right time, because the automotive industry is very location-dependent.”
“I think this is going to cause business liability issues within the value chain,” Ganguli continues. “If you think about the upstream value chain and motors, there’s a number of different types of industries.”
Industry members have already speculated that the Big Three’s plant closures will affect the global supply chain, causing a shortage of parts, exacerbating financial losses, and further disrupting the economy.
However, Ganguli believes there is a silver lining yet to be seen. Although financial departments are handling the market flattening, there is still potential for the economy to bounce back.
“[After 2008], for about a year, year and a quarter, volumes were down and then it started coming back up,” Ganguli says. “We had the best decade coming out of it for the automotive industry, where shareholder values in the automotive industry on the top 150, 200 global suppliers doubled in the next 10 years.”