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The COVID pandemic hit the auto industry hard. In the spring of 2020, the pandemic closed many auto retail stores for a month or longer… and shut down many factories for as many as two months. People stayed home, saved their money, stopped commuting… and stopped buying cars—especially during the first part of the year.

In other words, the previously roaring automotive industry and its global supply chain came to a halt.

This hit car company profits big time. The automotive industry sold about 14.5 million cars and light trucks last year, amounting to a 15% decline from 2019, and the lowest level since 2012. 

That said… car companies and consumers alike are expecting a better 2021. 

According to predictions by Fitch Ratings-Chicago, sales of U.S. light vehicle sales in 2021 are anticipated to total 15.6 million. Still, 2021 sales are expected to fall about 8% below 2019. According to predictions by Fitch, sales won’t reach that of 2019 until 2022 at the earliest.  

And although COVID takes the headlines for 2020, more exciting disruptions—including electric mobility, advancements of driverless cars and automation technology, and the rise of ridesharing patronage—were taking place in the industry even before COVID-19. 

Here’s what investors should know about the automotive industry. 

What Is the Automotive industry?

On any one car, there are about 30,000 parts. Before a car is ever assembled, the making of all of those parts takes a lot of hands and a lot of work. 

In the U.S., the automotive industry employs tens of thousands of skilled workers in all 50 states, which is in part why it’s considered a powerful engine driving the U.S. economy.

Globally, the automotive industry employs roughly 34 million workers. Approximately 25% of these workers are employed by automakers or original equipment manufacturers (OEMs).

What are original equipment manufacturers (OEMs), exactly? Automakers don’t make every piece of a car or truck. Instead, they buy them from OEMs. This leaves other companies to focus on rubber production for items like tires and belts, for example.  

The automotive industry extends beyond just auto manufacturers and OEMs. There is an additional market for aftermarket parts, a market for individual and fleet vehicle sales, a market for vehicle rentals, repairs, and more. Collectively, these subsets of the industry help the automotive industry to create jobs across sectors.  

These days, as cars get smarter, their parts are becoming more complicated. Electric cars for example, require a range of new, component parts, including lithium batteries, chargers and controllers.

The global supply chain that keeps finished cars moving off of the line is crucial to the manufacture of finished vehicles. A global semiconductor shortage is expected to majorly impact automakers this year. Ford Motor Co., for one, plans to slash its vehicle output by up to 20% in the first quarter of 2021 because of the lack of parts.

The increasing need for new, smarter parts will no doubt power increased demand across the supply chain. 

Why Invest in the Automotive Industry?

As of early 2021, inventory is running short and manufacturing engines are powering up again to meet new demand. 

In February, for example, U.S. manufacturing was operating at the fastest pace it has in three years because of a surge in new orders. According to the Institute for Supply Management, manufacturing activity rose to 60.8% in February, up from 58.7% in January. That marks the strongest performance since February 2018 and indicates an expansion in the manufacturing industry. 

Like with many other industries, the pandemic has accelerated existing trends in the auto industry, including both the growth of online traffic and a “greater willingness of OEMs to cooperate with partners—automotive and otherwise—to address challenges,” according to McKinsey. 

From an industry and consumer standpoint, the pause of the pandemic has also ushered in new excitement for the electric car, which are key to reducing emissions. According to Fitch, as emissions regulations tighten in global markets, specifically China and Europe, the pace of vehicle electrification is increasing.  

In recent years, more and more automakers are creating new electric vehicles (EVs). That said, the EV market is not without hurdles. Namely, they are still up against the familiarity and affordability of standard vehicles in the face of near-term uncertainty, according to the 2021 Deloitte Global Automotive Consumer Study.

Beyond electric cars, dealers and car makers alike are stressing customer experience, especially online. Although most customers still like to see their car before buying, no doubt, COVID has put a damper on the test drive. This is pushing more consumers to make their buying decisions online. So, while cars are getting smarter, car shopping is too, as car makers build data platforms to “to elevate and evolve the customer experience.”

Autonomous vehicles are also in the works, although they aren’t expected for large scale rollout just yet. 

In 2019, the global autonomous vehicle processor market reached  $5.07 billion. That number is expected to grow to $42.20 billion by 2030. According to one estimate by UBS Group AG analysts, the global robo-taxi market could be worth as much as $2 trillion a year by 2030. That’s not to mention the impact that the mass adoption of driverless vehicles could have on other industries who employ the technology. 

When they are finally ready, not only will self-driving cars allow drivers to do other things while their cars drive along, they should reduce collisions and traffic deaths by as much as 80%

The automotive industry will continue to be a key economic driver long after the pandemic, especially as innovations like electric power and autonomous driving take hold. While the industry is still coming back from the impacts of COVID-19, investors shouldn’t shy away from this powerhouse industry.

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The information and data are as of the May 12, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi. 

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