COVID-19 pandemic related business update
First nine months of 2020
The COVID-19 pandemic had a substantial impact on our operations in the first quarter, particularly in China, where most of our customers’ plants were closed for several weeks in February and operated at low levels in March. In Europe and North America, sales declined substantially in the second half of March as the pandemic led to customer plant closures. A large number of customer plants were closed in April and parts of May, followed by a ramp-up in June. According to IHS, global light vehicle production (LVP) declined by 24% in the first nine months of 2020 vs. the same period the prior year. The decline in global LVP and the slow and volatile restart and ramp-up had a significant impact on our sales and profitability in the first six months of 2020 while we managed to achieve improvements in sales, profitability and cash flow in the third quarter as our cost reduction initiatives and positive sales development more than offset the 4% global LVP decline in the third quarter.
Liquidity and management actions undertaken to manage this challenging period
During the first six months of 2020, Autoliv undertook a number of actions to support employee health and safety, corporate liquidity, cash flow and profitability. Actions included introducing a Smart Start Playbook for safe re-start and ramp-up, investing in employee safety equipment and re-designing production lines and work places as necessary. Other initiatives included drawing on our Revolving Credit Facility (which is now fully repaid), withdrawing full year guidance (now provided again), extensive use of furloughing (very limited use today), reducing headcount, sharply reducing capital expenditures, close monitoring of working capital, reducing or suspending discretionary spending and accelerated cost savings initiatives, cancelling the dividend and suspending future dividends, although the Board of Directors will review such suspension on a quarterly basis. Direct COVID-19 related costs, such as personal protective equipment, temporary supplier support and premium freight was around $10 million in the second quarter and around $5 million in the third quarter. Support from governments in connection with furloughing, short-term work weeks and similar activities was around $25 million in the second quarter and around $10 million in the third quarter.
In all regions, the automotive industry, including Autoliv, are in different stages of ramp-up of operations. Visibility and predictability of customer demand has improved but is still limited, particularly regarding the sustainability of current demand levels, including the effects on LVP of inventory build-ups, government vehicle subsidies and the risks of another wave of COVID-19 infections in one or more of the regions where we operate or have customers or suppliers.
While we continue to focus on health and safety and cost optimization, we are ramping up production in coordination with our customers and suppliers. Below is a summary of our current view of our three most important regions.
China: LVP was above pre-crisis production levels in the second and third quarter. IHS forecasting 5% year over year decline in LVP in the fourth quarter, the decrease mainly a result of high LVP in Q4 2019.
Europe: LVP development has improved gradually from second quarter’s Y-o-Y decline of 60% to a 8% decline in the third quarter according to IHS, which forecasts around 1% Y-o-Y decline in LVP in the fourth quarter.
North America: LVP development has improved gradually from second quarter’s Y-o-Y decline of 68% to unchanged in the third quarter according to IHS, which forecasts around 1% Y-o-Y decline in LVP in the fourth quarter. Inventory levels are still low in North America.