State of the automotive industry
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.
Challenges brought on by COVID-19
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:
- Evaluate the risks and create full transparency by using big data, intelligent systems and connected ecosystems. This communicates shortages or other challenges to all points along the supply chain so they can prepare, adapt or adjust accordingly.
- Mobilize a command center to orchestrate the response and configure the risk response. And all the while, operate with agility.
- After the crisis, operate risk mitigation as usual: integrate risk mitigation workflows, scenarios and (response) protocols into daily operations to quickly switch from normal to disruption response if needed.
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:
- Keep in close contact with your suppliers to ensure a quick ramp-up can occur when the market begins to recover and adjust your production levels and schedule accordingly.
- Consider increasing precautions to ensure workers’ safety, allowing for physical distancing and hiring specialized cleaning companies.
- Embrace Industrial-IoT-concepts to increase efficiency and prepare (future) shock protocols.
- Establish manufacturing resilience to accelerate the shift when ‘emergency mode’ needs to be activated.
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:
- Stay in close contact with major banks (e.g. verify credit lines) and establish a working-capital crisis mode that prioritizes payment obligations.
- Enter a stage of fixed-costs emergency mode. And consider the usage of AI in treasury management to set up real-time cash flow overview and forecasts.
- Furthermore, pay attention to the financial health of suppliers and dealers, as well as partners in general. They are also under financial distress.
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:
- Stay connected with customers via online and mobile channels.
- Focus efforts on generating leads through online car customization tools used by prospective buyers and consider utilizing virtual event platforms to compensate for cancelled trade shows
- Consider implementing a contactless sales process to meet health and hygiene safety requirements.
- Rethink your sales model for the future, embracing digital channels, as well as considering direct sales models.
- In the post-crisis phase, prices are likely to come under significant pressure given that dealers will need to reduce their inventories. But evaluate discount policies to balance volume and market share, profitability and brand image.
How automotive companies can respond 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.
Read our full report to learn more about our insights and actions we recommend.
1 IHS Markit
2 MarkLines (LMC Automotive Global Light Vehicle Sales Update, 16th March 2020)
3 IHS Markit
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)