Automotive Industry: COVID-19 Impact and Response Strategies
The coronavirus or COVID-19 outbreak which started in December 2019, is now spreading across the world at an increasingly alarming rate and has already been declared a pandemic by the World Health Organization (WHO). The coronavirus has already had a huge impact on all walks of life.
The automotive industry is no exception to this deadly pandemic. Automotive OEMs and their respective suppliers have been grappling with the disruption that this crisis has brought about all through the months of January, February and March. We will take a look at how the automotive industry has been impacted and the course of action in the near future as recommended by the experts.
The month of March brought the automotive industry to a screeching halt, with automotive OEMs around the world shutting down operations and manufacturing facilities as well as dealers shutting shops owing to complete lockdowns announced by the governments of countries all around the globe. Temporary shutting down of plants have already been announced by most of the members of the European Automobile Manufacturers’ Association (ACEA), who are also coming up against instances of infections and quarantines among their employees. Naturally, as a result of all this, vehicle sales have also nosedived. Events such as the 2020 Geneva Motor Show, 2020 Detroit Auto Show, The Battery Show Europe 2020 have either been cancelled or rescheduled. The COVID-19 pandemic has left the automotive industry reeling and staring at unprecedented losses.
Assessing the Impact of COVID-19 on the Automotive Industry
Roland Berger have assessed the potential disruption to global business with analysis focused on economic growth in key regions, i.e. China, the United States and the European Union. Three scenarios have been developed by Roland Berger predicting how the situation might develop in 2020 and 2021. Personally, I would pick the moderate scenario for my response plan, as per the present conditions but going forward, if the conditions worsen in any geography, I would be conservative & plan my actions for worst case scenario.
In China, the centre of the coronavirus pandemic, the GDP growth could go down as much as 3.5 percentage points in 2020 in a worst-case scenario. The “Profound Recession” scenario predicts a second outbreak wave in early 2021, with new outbreaks outside of the Hubei province and quarantine measures implemented in other regions. Due to factories remaining closed and a number of bankruptcies, there will be severe disruption in supply. At the same time, fiscal and monetary policy responses will not approach growth until the third quarter of 2020. The “Delayed Cure” scenario forecasts that new infections will decelerate but quarantines will still be there, thereby obstructing supply and decreasing domestic demand and exports. The most optimistic, “Fast Recovery” scenario predicts that the measures implemented by the Chinese government would be fruitful, quarantines swiftly revoked, and production starting again as usual, thereby causing just a small fall in demand.
The United States economy is not expected to be as notably affected as other regions, due to its strong domestic market focus and orientation towards services. The worst-case scenario predicts a tough impact on NAFTA supply chains along with a fall in consumption. This could result in a GDP decline of 1.2% in 2020. On the other hand, in the moderate scenario, interruptions of supply chains take place in only certain industries. Additionally, being an election year, monetary and fiscal boost is probable. Finally, in the best-case scenario, there is no GDP growth slowdown with a steady domestic demand and the normal continuation of businesses.
There is a possibility that Europe could be hit hard by a lengthened coronavirus pandemic. The worst-case scenario forecasts that complete containment of the coronavirus will not be achieved till 2021. Problems such as shortages of capacity in the healthcare system, and disruption of production of various industries will arise. The Delayed Cure scenario predicts vulnerability for supply chains from Asia to Europe, as also a collapse for supply chains within Europe. A decline lasting a short while could be seen in consumption and investments. The optimistic scenario foresees that disruptions will only take place in certain sectors; the supply shock would not be as robust and domestic production will be affected in Italy only. Demand is expected to fall only in industries such as travel and tourism.
According to Roland Berger, different business sectors are impacted differently due to the variations in supply and demand patterns. As a result of the slow growth rates in 2019, the already depleted automotive industry, is on the verge of the biggest slump. With vehicle sales significantly below their forecast numbers and no boost likely due to supply chain problems, Roland Berger states that there could be a drop of 10.6 percentage points in Gross value added (GVA) in 2020 in the worst-case scenario compared to the base-case scenario without a COVID-19 impact.
In the moderate Delayed Cure scenario, by cause of component shortages and supply chain issues, the first half of 2020 is expected to see a considerable dip in sales which is then followed by a rise in the fourth quarter of the year, thereby lessening the full-year effect. In the Fast Recovery scenario, a small tumble in sales volumes in the first half of 2020 is followed by an offsetting ascent in the second half.
The impact of COVID-19 on the automotive sector has also been explained by Deloitte from a different perspective. According to them, the impact of the coronavirus outbreak on the globally integrated automotive sector has been quick and telling. Initially, there were concerns regarding disruption in only Chinese parts exports. However, this swiftly swivelled to extensive manufacturing disruptions across the European continent.
The fierce pressure on an already afflicted global supply chain is being heightened due to the shutting down of assembly lines in the United States. Companies are already at risk of defaulting on commitments, possibly even requiring financial institutions to become involved. The current downward trend in global demand is made even worse due to the coronavirus pandemic, which is likely to give rise to merger and acquisition activities.
Possible effects on automotive companies in the long run include:
- With countries going into lockdowns, extended reduction in consumer demand may lead to a global recession, thereby reducing consumer confidence and majorly affecting incomes and profits.
- There may be a need for automotive companies to turn capital in a different direction so as to assist ongoing operations and R&D funding for new initiatives and other projects.
- Strategy to get out of profitless markets of the world, speeding up of vehicle segments and reducing output.
- Possibility of suppliers facing liquidity issues capitulating to the worsening market conditions, thereby giving rise to extensive disruption and potentially disastrous aftereffects throughout the global automotive network.
- Anticipation of substantial reorganising in the auto retail sector as dealers are unable to adapt swiftly to fluctuating demand conditions.
Measures and recommendations by Industry experts to tackle the impact
When the going gets tough, the tough get going. Strong leadership is critical in this time of crisis. Deloitte has recommended some immediate practical measures to combat the impact of COVID-19 on the automotive industry. Those include identifying, prioritizing and accelerating cost-out measures; optimizing working capital and identifying measures to deliver fast and tangible cash flow benefits; revising forecasts and prioritizing downside scenarios keeping in mind the market uncertainty; identifying potential collateral sources to ensure access to additional borrowing solutions; and finally an engaged workforce to focus on safety and care of employees.
According to McKinsey & Company, companies in advanced industries should respond in a quick and decisive manner to the COVID-19 threat. They have offered certain recommendations to aid such companies in planning for the long haul and their efforts on the path of recovery. Firstly, they recommend establishing a ‘nerve center’, which is a dedicated team responsible for creating a threat-map, establishing a risk log and developing an integrated plan. The nerve center serves as an information center, manages risks and responses and aligns all stakeholders. Protecting the employees comes next. The companies should make employee health their principal concern and alter production as required. Screening and safeguarding the supply chain is the next recommendation. The companies must understand the supply chain risks and take appropriate action to tackle the disruption. McKinsey & Company further advise adapting marketing and sales. It is important to recognise and alleviate the risks of sinking sales while meeting customer needs. Finally, it is recommended to maintain the financial health of the company by improving liquidity, cutting down costs and taking care of other members of the ecosystem.
The recommendations given by McKinsey & Company have been looked at in detail below:
Establishing a nerve center
The nerve center is a dedicated team located centrally which does the task of co-ordination of response to the coronavirus outbreak across different locations and units. The nerve center is responsible for steering the organisation. The nerve center comprises of people with varied functional expertise who have been vested with decision-making powers on critical topics.
This nerve center is expected to focus on:
- Creation of a threat-map dashboard: The lead personnel, together with IT and use of digital tools should create threat maps with actual data obtained from internal and external sources. As an example, this map can illustrate the spread of the virus in important export markets or supply chain disruptions.
- Establishment of a risk log: The threat map does not effectively encompass every detail. If there are any extra threats, the information can be quickly uploaded to a database which can be accessed by everyone. This will facilitate a swift response by the nerve center.
- Development of an integrated plan: The updates received by the nerve center can be developed into a plan to make sure that all teams synchronize their efforts and ensure that the correct practices are being followed.
The nerve center is expected to eliminate red-tapism in decision making. Transparency is furthered by the nerve center by updating everyone involved with the company right from employees to suppliers regarding the hazards of the coronavirus and the company’s plan of action against it. To put it simply, the nerve center should serve as the central information and truth provider.
Companies are taking action to safeguard the health of their employees and provide information about possible threats. Measures such as reduction of employee contact to a bare minimum, provision of protective equipment, limitation on travel, onsite health examination and sanitization are being implemented.
Role, location, and company may cause variations in the certain measures. However, a few measures that may be important independent of location are:
- Development of plan of action pertaining to various scenarios, such as the response of the leadership if colleagues are infected
- Empowerment of employees by permitting remote work and collaboration
- Bringing up-to-date operational processes including safety practices and operating hours
Obviously since the safety of employees takes priority, the factories will not work at capacity. There also exists the possibility of suppliers not fulfilling their delivery targets. These issues require a response which will set the tone for a speedy recovery. It may be necessary for companies to alter their priorities or set new ones as per the importance of respective customers, shortages and revenue losses. Collaboration of the top brass of production, supply chain, marketing and sales is essential to make these decisions.
Examining and protecting the supply chain
Supply chains of automotive companies have very vast expanses across continents consisting of a very large number of vendors and suppliers. Beyond immediate suppliers, the leadership often tends to have little awareness about supply issues. With the coronavirus causing widespread disruption around the world, transparency is the need of the hour. For automotive OEMs, simply having information about the operating of their Tier-1 suppliers is not enough, they must also be informed about disruptions happening at the Tier-2 suppliers.
Despite the time-crunch faced by most companies, it is vital to spring into action with critical measures such as working meticulously with Tier-1 suppliers in order to acquire a better understanding about their capacities and issues. It is likely that the effect of disruptions taking place in the first month of the year may not be felt for a number of subsequent months. Therefore, in order to recognize and solve issues efficiently, OEMs and their Tier-1 suppliers can consider entering into joint agreements.
Companies can also explore other options such as hunting for vendors from low-risk areas if they think that there are going to be shortages from their first-choice suppliers. The process for selection could be accelerated and companies can then assess how negotiations will be affected by future shifting of suppliers.
To tackle the shortages, companies can look into other measures such as pre-booking freight capacity, accumulating important parts, buying components that their Tier-1 suppliers may need and planning to take full advantage of the prevalent aftermarket inventory.
In case vital vendors close their operations, revival plans can be put in place by companies which give an insight on how shortages can be tackled, how suppliers can be helped and how recovery can be furthered. In order to ascertain the effects of disruptions on the supply chain, the leadership may potentially work with individual business units.
Companies dependent on Chinese vendors are expected to experience the full force of the shutdown in the coming weeks as their Tier-1 suppliers are unable to procure the materials required for production. A few have started to recover and therefore, companies should monitor these happenings attentively. Companies may want to develop a reserve of either components or finished goods, so as to take care of demand for as much time as feasible.
Reworking marketing and sales to befit changed consumer behaviour
The personal touch is key to buying and selling within the automotive industry. Consumers seek product details, discuss their choices and take a call regarding models offered by the company. This happens through all-encompassing exchanges with the sales personnel at dealerships. The coronavirus outbreak has completely altered this interaction because of restrictions and lockdowns imposed. In light of this situation, OEMs can look towards digital marketing and sales, by offering customers and dealers the chance to buy and sell respectively through the internet.
On the other hand, for several customers, it is also true that digital information cannot take the place of an actual test drive. In such a scenario, home demonstrations and test drives can be delivered to the customers. OEMs can help dealerships in this. It will not only minimise human contact but also provide customers a real-life experience.
In addition, automotive OEMs can tweak incentives and promotions depending on the effects of the coronavirus outbreak on their portfolio. If a shortage of particular materials is forecast, then the company can reconsider planned promotions.
Preserving financial health
Cash flow and profits will be negatively influenced by the coronavirus. Rising procurement and capital costs as well as postponed purchases will contribute to that. To revive and bounce back as fast as possible, financial stress tests can be done, which check the cash flows and balance sheets. These can then be used to determine how the finances might develop in case one or many of the scenarios defined by the nerve center becomes a reality.
Liquidity improvement is likely to be high on the priority list of companies, for example by renegotiating supplier agreements, incentivising advance payments from customers and requesting banks for extended payment terms. Cost control will play an important role, and spending plans will likely be reviewed every few weeks. Return on investment for new spending requests will be reviewed and there is bound to be cautiousness within the leadership about endorsing new expenditures.
The top brass could also potentially look at other possibilities of cost cutting and reassess strategy. Expensive product launches which would not necessarily grow profits in the current or upcoming financial year could be postponed.
Contribution of automotive OEMs and suppliers in the war against COVID-19
Despite the massive setback, automotive OEMs and suppliers around the world are doing their bit and contributing in the fight against COVID-19. Manufacturing facilities and production lines are being rejigged to join the resistance. Contributions have also been coming in the form of donations of medical supplies such as face masks, protective suits and hand sanitizers. Carmakers in the United Kingdom, such as Vauxhall, Nissan and McLaren are ready to act when the government demands it. Fiat Chrysler is endeavouring to help in the production of respirators, which are desperately needed for patients in Italy. Additionally, Fiat Chrysler has also confirmed plans to produce 1,000,000 face masks a month and distribute them to emergency services in North America to help the fight against coronavirus.
The leading automotive OEMs in India as well have pledged and taken action to support the government in its fight against the coronavirus. The Mahindra and Mahindra group has taken the lead by offering to produce ventilators at their production facilities as well offered their hospitality resorts as care facilities for the infected patients. The Tata Group comprising of the Tata Trusts and Tata Sons, has announced the combined donation of approximately $200 million towards coronavirus relief fund.
Automotive suppliers have also put their hand up in providing relief measures against the COVID-19. Coming to the aid of healthcare professionals, Valeo donated 30,000 masks whereas Faurecia donated a whopping 100,000 masks to local hospitals in France.
To sum up, regardless of the forms of donation, it is evident that automotive OEMs and suppliers are displaying their incredible sense of social responsibility. Despite the problems and losses the companies themselves are facing, it is heartening to witness the human race come together to put an end to this suffering and resume normal life.