After COVID, the automotive industry will need to navigate in a new normal. Let’s consider some of the possible scenarios and impact areas:
- Reduced demand will put immense pressure on automakers’ revenue and profitability;
- Liquidity prioritization in an effort to continue operations may starve R&D or other technology initiatives;
- Likelihood of an increase in M&A activities to consolidate operations under challenging financial scenarios;
- Supply chain becomes a very central issue for the C-level leaders;
- Social distancing will have significant impact on consumer behavior and usage of digital tools and channels for customer engagement will become key;
- Accelerated move towards pay-as-you-use models.
Supply ChainWhen the pandemic started impacting China in early 2020, the supply chain was the first area which was impacted. Nearly 80% of the global automotive supply chain has links to China in some way or the other. As manufacturing stopped in China, capacity evaporated within weeks and it started impacting global auto manufacturing establishments. As manufacturing comes back, many suppliers facing liquidity issues may succumb to market conditions. This can cause potentially large disruptions and have dire consequences across the global automotive manufacturing ecosystem.
Supply chains perform a balancing act between cost and service and are continually adjusting to provide efficient service in the most cost-effective manner. Most often, supply chains realize lower costs by applying lean methods and “just in time inventory” policies. While these methods work well during most normal operating conditions, they do not respond well when subject to significant disruptive events.
After COVID, we predict a renewed focus in the areas of supply chain strategy (in terms of near shoring, multiple vendor/geographies, risk assessment, etc.). Some of the areas which OEMs should focus on are deep and near-real time visibility across the supply chain tiers, advanced supply chain risk modeling, early event detection capability, component substitution and automation-ready processes. We will discuss some of these in detail in our next post.
Going forward, the automotive industry will likely to be building flexibility and resilience into the supply chain, along with cost efficiency.
Digital customer engagementAs a direct impact of the COVID-19 outbreak, physical customer interactions at dealerships, auto shows, etc., will reduce -- either due to regulatory mandates or by choice. This will result in increased demand for engaging with prospects and customers in the digital medium. There will be even more spend on digital marketing platforms and process digitization efforts will get accelerated. This may call for necessary rationalization of physical channels. Some industries, like banking or e-commerce, are already higher up in the maturity curve in adopting digital customer engagement practices. The automotive industry can learn from some of the best practices from these industries to have a steeper learning curve.
Social distancing and the changing consumer behaviourAfter COVID, customers’ consumption behaviour is expected to shift to a new normal. Some of the possible scenarios could look like this:
- More people continue to work from home and avoid large gatherings/event, leading to lesser mobility needs;
- Shared mobility and car pooling demands may decrease due to possible health and safety concerns;
- Environmental impact becomes very important in the purchase decision.
Accelerated move towards pay-as-you-use models
Pre-COVID, there was already a significant shift in the automotive industry to “pay-as-you-use” models. After COVID, this shift will be accelerated as more and more consumers tend to have a less optimistic economic outlook and avoid large capital expenses. This is a significant shift in the automotive business model - from upfront revenue recognition to small revenue streams over an extended period. Successful migration to this new business model needs strong insights into the consumers’ diverse mobility needs, consequent vehicle duty cycles, granular cost of operation, continuous tracking and monitoring of large dispersed fleets, optimising logistics operation, etc.
Huge focus on cost and profitability leversAmidst the global disruption in demand, there will be a paranoid level of focus on cost. CFO organizations and the business unit P&L owners will need actionable near-real time insights to act upon in order to improve profitability. This calls for a granular level allocation of all cost drivers and a real/near-real time visibility of these drivers.
The automotive industry has been thriving for over a century, having withstood many upheavals and transformations in the past. It is a fountainhead of innovation and resilience, always adapting to the changing market, consumer and technology scenarios. These inherent strengths will surely enable the industry to emerge from this crisis even stronger.