
COVID-19: Mobilizing the automotive industry now
April 7, 2020
April 7, 2020
Faced with declining sales, global political uncertainty, CO2 penalties, and rapidly changing customer demand, most car manufacturers have been facing a perfect storm of challenges since 2019—which are mainly driven by Connected, Autonomous, Shared and Electric mobility (CASE). These circumstances have only been exacerbated by the onset of COVID-19, a global pandemic that is affecting every aspect of the automotive sector —from parts suppliers all the way to dealers.
These disruptions are causing unprecedented uncertainty. Continuous changes in the market make it challenging to predict the recovery trajectory, and especially the impact it will have on the timeline of CASE-related initiatives.
COVID-19 is disrupting the global automotive value chain. Here are a few of the key challenges facing the industry, as well as suggestions that can help quickly address them:
Since OEMs rely heavily on just-in-time production, their supply chains were immediately disrupted. In China, almost two-thirds of auto production was directly affected by the country’s industrial shutdown, which had a large impact on their suppliers as well1. Furthermore, the shortage of Chinese-made parts has had a heavy impact on global production.
How to manage now:
While the situation in China is starting to stabilize5, most of the US and European car manufacturing is under huge uncertainty on when plants will resume normal production. At the same time, OEMs are starting to shift engineering, assembly and even procurement capacities to produce and source medical equipment. Regardless of whether the halts are required by health and safety enforcement, legislative inaction, declining demand or a lack of parts in the supply chain, the consequences remain the same: job losses, a predicted drop of 16 percent6 for the automotive production and hence, a severe impact to GDP.
How to manage now:
Cash is king—and it becomes even more critical during times like these. Some OEMs have low liquidity, and with minimal operating cash flows, the remaining cash reserves are on average depleted in less than two months7. This has led various OEMs to negotiate higher credit lines. Furthermore, the massive drop in market capitalization will likely accelerate industry consolidation. And without securing additional funding, some players risk going out of business. This financial challenge will impact transformational investments into connected, autonomous, shared and electric mobility, which are likely to be deferred.
How to manage now:
China is still the world’s largest market for light vehicles. The sales drop in February 2020 of more than 80 percent2 in comparison to January is a strong indicator of the direction the global market is heading, and the impact is already visible. Forecasts for global light vehicle sales in all major regions predict that the market will drop by around 12 percent3 in 2020, and it is very unlikely that these circumstances will change soon. Sales forecasts for the US estimate a decline of 9 percent4 annually that consumers are not buying new vehicles due to the pandemic. Changes in customer behavior in response to being on “lockdown,” such as less mobility and more online shopping, might remain after the crisis passes.
How to manage now:
Automotive companies should develop a rapid response to address these current disruptions. They should look into strengthening operations in preparation for potential risks and adjust to this “new normal”. A crisis control tower can help to coordinate these actions.
How OEMs should respond to the ongoing crisis: Start by implementing immediate measures for people’s safety. To ensure an effective collaboration across your organization, set up a digital workplace. Also, make sure to create transparency to enable effective decision making.
How OEMs should reset their ways of working: Identify hidden and trapped value, especially in operating costs. Consider a flexible supply chain to be able to pivot your product portfolio. And stay sharp regarding risks across all functional areas.
How OEMs should renew for the ‘new normal’: Review strategic roadmaps and investment efforts and reprioritize them. At the same time, scan the market for inorganic growth opportunities. This includes creating cost efficient operational strength by redesigning towards intelligent operations. It also requires digitally enabled people and back office processes.
Read our full report to learn more about our insights and actions we recommend.
Resources:
2 MarkLines (LMC Automotive Global Light Vehicle Sales Update, 16th March 2020)
4 Reuters
5 MarkLines (LMC Automotive Global Light Vehicle Sales Update, 16th March 2020)
6 RBC Capital Markets; European Automobile Manufacturers Association
7 Source: Bloomberg; Accenture analysis of Top Auto OEMs. Cash Burn Rate = cash & cash equivalents / monthly operating expenses (excluding depreciation)