The Auto Industry Wants to Restart in May. It’s a Lot More Complicated Than That
Also today on Speed Lines: GM suspends stock buybacks, and electric scooters could be the next big thing.
Good Monday morning and welcome back to Speed Lines, The Drive's roundup of what matters in the world of transportation. As we approach May, the world is taking tepid steps at reopening the economy. Are we ready for everything that entails?
A Complicated Restart
As automakers convert factories to wage war on coronavirus, they're also looking at potentially ramping up car production once again in May. But it's not going to be as easy as ordering employees back to work and flipping a switch. That's because the supply chain for the car industry is so global, so complex and so dependent on companies that make seats and glass and other parts that a restart will be incredibly tough to coordinate. And a lot of that these days is centered around China, which is facing its own difficulties restarting its economy.
Think of it this way too in America: if you're a car plant in Tennessee that depends on parts from a factory in Indiana, and those states have different stay-at-home orders or coronavirus outbreaks, how do you make this system work?
Automotive News kicks us off with this must-read story about how an auto production restart could look:
It is the supreme question of the moment. Parts manufacturers, automakers, truckers and materials producers are desperately eager to resume building cars and trucks. But given the industry's complicated network of companies and vendors sprawled across the continent — and around the world — how?
[...] Doug Betts, who has worked in manufacturing and quality posts at Chrysler, Toyota, Nissan and Michelin and is now president of J.D. Power's automotive division, suggests there is some degree of wishful thinking going through the industry.
"There's some small suppliers that don't have those resources available," Betts said during a podcast with Automotive News last week, referring to the challenge of coming back online while also accounting for new health and safety issues.
Betts said he believes it will take weeks longer than imagined to begin filling up the industry's pipeline of parts.
"There's still a four-week gap on the ocean for parts coming from China when they start back up," he said, referring to China's multiweek economic interruption. "That has to be dealt with, and it's pretty broad.
"You have your local suppliers that may be shut down," he added. "There were trucks on the road — you probably exhausted those, and so you've got to refill that."
So we could be looking at industry-wide changes in how factories work at the end of this.
GM Shores Up Cash
General Motors says it's focused on saving up cash to get through the downturn in new vehicle sales. That means no more share buybacks, according to Automotive News:
The company has also expanded its cash options by extending a three-year revolving credit agreement for $3.6 billion to April 2022. Earlier this month GM and GM Financial, its captive finance company, also extended a $2 billion 364-day revolving credit agreement to April 2021. In March, GM pulled $16 billion from existing credit lines, doubling its cash reserve.
[...] “We continue to enhance our liquidity to help navigate the uncertainties in the global market created by this pandemic,” GM CFO Dhivya Suryadevara said in a statement. “Fortifying our cash position and strengthening our balance sheet will position the company to create value for all our stakeholders through this cycle.”
I'll admit this isn't the sexiest news to start your morning with, but it's important. Share buybacks—where companies use their free cash to buy back their own stock in hopes of boosting share prices—have proven to be an extremely controversial part of the coronavirus-related downturn. Lots of huge companies are after federal relief and/or bailouts when they had every chance during the Great Recession recovery to save up cash for a rainy day. Now, the rainy day is very much here.
The New York Times has a timely story on this here, focusing on KFC and Taco Bell, which "made payments to shareholders that were equivalent to a third of the $145 billion in pandemic relief that the industry requested":
Still, the crisis has exposed the potential failings of a strategy embraced by many big companies: aligning their priorities with the interests of shareholders, many of whom are narrowly focused on the performance of a company’s shares. Shareholders, wanting stock prices to go higher, pushed management to use up cash on buybacks and dividends. And senior executives, paid largely in stock and on the basis of how the stock performed, were happy to oblige. The result was that companies often didn’t have much spare cash, leaving them even more exposed to economic downturns.
“They should have built up some buffers against such sudden shocks and risk,” said Willi Semmler, an economics professor at the New School for Social Research in New York.
As for GM, it tapped $16 billion from its credit lines in March. Under CEO Mary Barra's tenure, the automaker has also done a solid job of cutting back on money-losing product lines and brands like Opel/Vauxhall and Australia's Holden. It may be in a better position to get through this than many large companies, and certainly better than it was going into 2008.
A Moment For Electric Two-Wheel Vehicles
In America, we tend to think of scooters and motorcycles as toys—Vespas and Harleys and literbikes for people to play around with. But in Asia, Europe and Latin America, they're a cheap and viable means of getting around, just like cars are. And the Wall Street Journal reports that in those markets especially, we're poised to see a boom in electric bikes and scooters:
With auto sales slowing in the biggest developed markets, electric two-wheelers may soon have their moment. Hundreds of millions of them will likely be sold in places like India, China and other emerging markets, according to projections from the Energy and Resources Institute, a New Delhi think tank.
Gasoline-powered bikes still make up the bulk of two-wheeler sales, but companies like China’s Nasdaq-listed NIU Technologies and India’s Hero Electric Vehicles Pvt. Ltd. have begun offering reliable electric motorcycles and scooters at more affordable price points. Startups aiming to become the Tesla of two-wheelers are touting high-tech, sleekly designed models for less than $2,000.
An electric-motorcycle boom could launch a new generation of drivers who prefer electric vehicles, and may be more likely to choose electric cars once they can afford them, say analysts and executives.
This will be a trend to keep an eye on, but it's great to hear. It's a great way to bring down emissions in places like India and China, and totally makes sense when you realize how scooter-dependent those countries are.
On Our Radar
Follow the latest on assembly plant closings (Automotive News)
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Does the auto industry become less globalized after this? How do these interconnected factories restart amid a pandemic that affects certain areas differently from others?