COVID-19

Zita Zigan, Director, Global Commercial Vehicle Forecasting

23 April 2020

Impact of COVID-19 pandemic and containment measures on global Commercial Vehicles

Economies around the world are in shock, and the shock waves caused are reverberating around the automotive sector. True to its nature as the most volatile and capricious amongst the various segments that make up the sector, the global Commercial Vehicle Market is reacting with typically dramatic fervour. In Europe and North America, this is still – at the time of writing – mostly manifesting in forward-looking indicators, while parts of Asia are already further along the trajectory of the crisis – and, encouragingly, there are signs of tentative recovery here and there.

The calamitous unfolding of the COVID-19 pandemic in 2020 has prompted us to slash our MHCV sales and production forecasts compared to last quarter’s update. In many cases, the revisions have been in an order of magnitude not seen since the global financial meltdown of 2008/2009. Global truck sales for the year as a whole are expected to fall by 25%. Global truck output is expected to decline by 30%. For comparison: our December forecast called for an 8-9% decline.

“Truck sales picked up in March and are likely to receive something of a boost in April and May from regional crackdowns on older trucks below the State V emissions standard”

With COVID-19 now a global pandemic, China’s truck market remains exposed to uncertainty and external risks. Following extensive shutdowns (late January-February), activity resumed in March. According to early indications, there are positive signs of normalisation with factories and dealerships reopening and economic activity resuming. Truck sales picked up in March and are likely to receive something of a boost in April and May from regional crackdowns on older trucks below the State V emissions standard. The State VI standard is due to come into effect in a number of cities, including Beijing, in July. Nationwide introduction is scheduled for July 2021. The technology upgrades required by State VI will lead to a considerable increase in vehicle manufacturing costs, such that we expect to see boosted sales ahead of the respective deadlines, followed by payback, with demand being hit in H2 2021 and possibly even in H1 2022.

Most of Europe and North America, meanwhile, is in a form of lockdown at the time of writing. Our core forecast scenario assumes that the measures currently deployed will succeed in suppressing the growth in new COVID-19 cases by early May (depending on where countries are in the curve – this point has already been reached in Italy and Spain). We assume that lockdown measures will then be lifted in a gradual and controlled way. Governments will no doubt be better equipped to manage future spikes in cases, with more capacity in the health system and better testing and tracing capabilities. Nevertheless, until there is a vaccine, waves of infections are likely to cause distortions, and further lockdowns and social distancing measures could well be deployed again every time the exponential growth in cases threatens to ramp up again.

As far as the truck market is concerned, this implies a lot of demand-side volatility, with sales expected to be sent into a tailspin during Q2 2020. A tentative recovery is expected to emerge in Q3, though this upward movement will be slower than the precipitous and sudden crash that preceded it. A return to recent ‘normal’ levels of demand is not envisaged before next year, and there is a risk of setbacks along the way.

“OEMs will need to establish their position against a background of lower demand, stock levels of finished vehicles and components, with lingering doubts over the robustness of supply chains and future supplies of critical parts.”

On the supply side, the picture is similarly stark: at the time of writing, extensive production shutdowns prevail in North America, Europe and other countries. Plants are likely to remain closed until the end of April, before slowly returning to a modest level of capacity. OEMs will need to establish their position against a background of lower demand, stock levels of finished vehicles and components, with lingering doubts over the robustness of supply chains and future supplies of critical parts. It will be many weeks before they will be in a position to resume capacity utilisation approaching anything like normal levels.

The rapidly deteriorating production outlook – due to supply side factors, as well as the imminent shock to vehicle demand – has wiped out any tentative optimism brought about by the turnaround in European truck orders. Orders had declined through the first nine months of 2019, but rebounded in Q4, with manufacturers reporting rises in their Q4 order intakes of 40-50% compared to Q3. These shoots of recovery were destined to become a footnote in history as the unfolding pandemic rapidly reshaped the likely course of events in early 2020. They do, however, govern our expectations beyond the near term, with European output expected to return to pre-crisis levels within two years.

“Forecast changes reflect not only the coronavirus at the front and the EPA’s proposed 2026 rulemaking at the end of the forecast, but also a change to the middle: the prebuy and payback assumptions in 2023 and 2024 were removed.”

Our partner ACT’s North American forecasts were slashed in March in response to the changed outlook, with Classes 4-8 sales and production expected to fall by 37% and 44%, respectively. While the forecast has been set lower, the key assumption is unchanged: Class 8 market weakness will extend through 2021, before a recovery to trend in 2022. Forecast changes reflect not only the coronavirus at the front and the EPA’s proposed 2026 rulemaking at the end of the forecast, but also a change to the middle: the prebuy and payback assumptions in 2023 and 2024 were removed. MD production and retail sales are also expected to fall significantly in 2020. While the MD market has largely been insulated from the manufacturing and freight recessions to which the Class 8 market fell victim in 2019, COVID-19 is hitting the consumer segment head-on.

For Europe and North America, the very-near term (one month) outlook remains, to put it blandly, difficult. Yet the situation in China offers hope, of sorts, for the not-quite-as-near-term (three months): most OEMs have reported a substantial, and close to complete, return to production capabilities. The medium term (six months+) should offer further relief – with some pent-up demand likely to be released in the form of a sales rebound. The advent and global rollout of a vaccine, expected by mid-2021, should bring to an end the significant human tragedy and economic toll wrought by the pandemic.