"European vehicle sales will be severely affected by the coronavirus crisis. Automotive executives need to rethink priorities and radically adapt their business model to a new reality."
How automotive companies can secure short-term survival and prepare for a post-coronavirus future
Priorities for the automotive sector in the crisis
As Covid-19 continues to spread across Europe, car production has effectively ground to a halt. To make things worse, no one is currently able to predict when the pandemic will be brought under control and when car production will swing back to its pre-crisis level. This puts automotive executives under extreme pressure. They have to make critical decisions with almost no certainty as to how the situation might look the next day. Scenario planning appears to be the most beneficial tool to navigate through this extreme uncertainty.
Three forecasts are currently widely debated:
- V-shaped: Fast recovery
- U-shaped: Delayed cure
- L-shaped: Profound recession/depression
However, given the continued shutdown of auto plants and prolonged restrictions in place, the most optimistic scenario – "Fast recovery" – no longer appears realistic. We assume that even if business does bounce back sooner than expected, automotive manufacturers will feel the impact of the pandemic throughout their entire operations. Covid-19 will not only jeopardize supply chains and consumer demand for vehicles, but will also shake up the innovation cycle of the whole industry. Depending on the specific forecast applied, our analysis shows that the effect on 2020 European vehicle sales varies from -12% to as much as -38%.
The auto industry will see a sharp decline in vehicles sold
Under any scenario, all OEMs and suppliers will need to take decisive measures now in order to manage the crisis. The severity of tactical measures deployed will depend on a company's specific financial position. Based on our analysis, there are five key priorities for automotive executives for securing short-term survival and readiness after the first wave of the Covid-19 earthquake:
- Ensure the health of staff and identify vulnerabilities
- Deploy short-term liquidity measures
- Secure funding and access to state aid
- Prepare for an efficient restart after the crisis, ensuring employee health
- Emerge stronger out of the crisis
As these priorities require stringent coordination and execution, very effective management is required. With every crisis also offering opportunities to emerge even stronger, our recommendation is for companies to proactively think about new opportunities within and beyond the business as well as in the macroeconomic environment.
The crisis as a chance: New opportunities for auto manufacturers
Looking forward, this crisis will eventually end, and we believe that the automotive industry will look different in the post-Covid-19 world. To date, the industry is truly globalized: from production networks to supply chains and highly complex logistics. Customers, too, are offered an almost endless choice of specific variants (especially by the German OEMs). In order to remain competitive, gradual efficiency gains and limited risk management were largely sufficient.
In the post-coronavirus era this will very likely change. Regional or even local production networks offer the chance for OEMs to lower their level of global dependency. The same applies to local supply chain networks and warehouse and reserve strategies. The "build where you sell" paradigm might become the lead idea when it comes to designing the production footprint, and risk management incorporating the principle of "expect the unexpected" gives manufacturers the chance to be better prepared for the future. All of these aspects will likely affect the cost side and, consequently, the margin levels. That is why we believe that business models will also change significantly: The bandwidth of variants offered today must be reduced and balanced in terms of the cost/benefit ratio.
Even more than that, the current business models require a revolutionary update and new radical approaches for efficiency improvement. These should include broad usage of agile working methods, streamlining of existing processes and decision paths, leveraging the improvement potential of digitalization and lowering the capital expenditure requirements for single companies, such as through stronger partnerships and cross-company collaboration. At the very least, the crisis offers one positive opportunity: Companies have the chance to break with old habits and experiment with new ways of doing things.