Magna sees boost amid COVID-19 following layoffs, spending cuts

Magna International, Canada’s largest auto parts manufacturer, says it’s in a solid position to weather the economic downturn caused by COVID-19, in part due to spending cuts and layoffs.

The Aurora, Ont.-based company reported a profit in its most recent fiscal quarter, following a second quarter that saw the worst year-over-year decline in vehicle production. Chief executive Don Walker called Magna’s second quarter “the worst decline that I have experienced in my 40 years in the auto industry.”

While vehicle production around the world is down and has yet to recover to pre-pandemic levels, Magna has managed to increase profit as well as its outlook for the remainder of the year.

“A lot of the actions we took at the end of Q1 and Q2, we’re seeing the benefits of in Q3,” the company’s chief executive Vincent Galifi said in an interview following the release of results last week. Among those actions were spending cuts, plant consolidations and layoffs.

“We looked at discretionary expenditures across the organization and unfortunately did some right-sizing of people that we are not going to bring back.”

While he did not specify the number of employees that have been permanently laid off, severance related to cuts cost the company $150 million. Magna expects overall restructuring to save $200 million.

The company’s stock (MGA) jumped more than five per cent on Monday, as global markets rallied over COVID-19 vaccine optimism.

The COVID-19 pandemic forced many of the world’s major automotive manufacturers to shut down production, as companies dealt with pandemic concerns and restrictions, plummeting demand and disruptions in the supply chain.

Global vehicle production fell 25 per cent in the first nine months of the year, according to Magna, largely due to the COVID-19 pandemic. At the same time, production in North America and Europe – Magna’s two most significant markets – fell 28 per cent and 31 per cent, respectively. China also saw production fall 11 per cent.

Galifi doesn’t expect those production levels will recover any time soon.

“If you look at a two or three year period, I don’t think that globally you will see volumes come back to the levels we were seeing in 2019,” he said.

“There’s been a tremendous amount of wealth destruction, which is going to impact our industry. Governments have done a good job supporting economies around the world, but the toll this is going take is enormous around the world, including in our industry.”

Part of Magna’s solution in dealing with lower vehicle production levels has been to scale back the company’s fixed costs – or, as Galifi puts it, “right-sizing the business.” He said the company’s solid financial footing will still allow it to invest in new technology, including in electrification and autonomous driving, two key areas of focus for Magna in recent years. Magna recently announced plans to partner with California-based upstart Fisker to build the company’s electric SUV.

CIBC World Markets analyst Kevin Chiang wrote in a note to clients that Magna “is well positioned to take advantage of the rapid technology shift” happening in the auto industry, and that the company will continue seeing benefits of its cost cutting decisions through the rest of the year.

“This is a great time for us to hunker down and continue to push forward,” Galifi said.

Magna now expects 2020 sales to come in at between $31.5 billion and $32.5 billion, up from a previous expectation of between $30 and $32 billion.

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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