Challenges before the automobile industry due to Covid-19 and how to overcome
Covid-19 has made the situation highly challenging for nearly all industries. While the travel and tourism industry, as well as aviation, have been hit particularly hard by the pandemic, several other industries too are facing a similar crisis including the automobile industry. With time, the impact is growing all the more bitter since the continuously growing unemployment rate in major markets including the US will force people to cut down their consumption and expenses resulting in heavy decline in car sales. The challenge is not related just to demand but supply will also fall since production has halted in most corners of the world and even as there are signs of recovery at some places, full-scale production like earlier might not be possible for some months. While the likelihood of a global recession cannot be denied as countries including the US and the UK are fighting very hard to emerge from the crisis, containing the pandemic completely will most likely take some more months. In the automobile industry, both production and sales have fallen dismally. Reopening of factories and for production to commence while companies will need to do a lot of planning and make fresh arrangements so that production can be carried out with proper precautions, there are other several challenges too before the car producers related to the labor force and supply chain.
Just like the automobile industry depends on a healthy global economy, the global economy also depends on healthy automobile industry for growth. Apart from employing a very large number of people globally, directly and indirectly, the well being of the automobile industry is also essential for the wellbeing of several other upstream and downstream industries. Upstream industries like steel, chemicals, and textiles depend heavily on this industry and similarly, downstream industries like repair and mobility services also depend on the automobile industries. The importance of the automobile sector can also be understood from the employment figures. The automobile sector employs around 14 million people in Europe, 8 million in the United States, and around 5 million in China. The turnover of this sector constitutes around 7% of EU GDP, 3 -3.5% of the overall GDP in the US, and 10% in China. So, while the automobile industry is major support for the global economy, the pandemic has put immense pressure on this sector.
While Covid-19 has brought a series of challenges to the automobile industry and disrupted the global automotive value chain, there are four leading challenges that the industry sector is facing. Let us take a look at the leading challenges that the automobile industry is facing due to the pandemic and how the car manufacturers can manage these challenges.
Supply chain Disruption:
Since the automobile manufacturers rely heavily on Just in Time production, the impact on their supply chains was immediate. Covid-19 led to the disruption of supply chains globally creating a situation of emergency. Moreover, Covid-19 is not a short term crisis and its implications for supply chains will be long-lasting. The Hubei province of China was a major component hub and also the most affected area in China. As a result, there was a heavy impact on the entire supply chain network in China. The industrial shutdown in China affected almost two-third of automobile production in the country and the impact was severe on the suppliers as well. Moreover, this has led to a shortage of Chinese made parts all over the world and had a severe impact on production globally. According to PWC, the impact of disruption is likely going to be higher on tier 2 and tier 3 suppliers.
Managing the supply chain risk in the automobile industry:
Managing the supply chain risks during the pandemic will not be an easy task for automobile manufacturers. However, automobile manufacturers must assess all the risks. The companies with an extensive international supply chain must assess all the critical components that are in short supply and should consider adopting alternative strategies for sourcing critical raw materials. A very large number of automobile manufacturers in the North American market depend on their suppliers based in China for parts including wheels, brakes, steering components, and electronics, they can also develop strategies to source these parts from the local markets.
The auto manufacturers must also consider improving supply chain visibility and communication lines so that they can detect problems early and start working on developing remedies. Once the crisis is over, the companies should start risk mitigation just as usual and integrate risk mitigation strategies and protocols into their daily operations so that they can take a disruptive action if needed.
Another major challenge before the automobile industry is related to the manufacturing shutdown. Companies around the world have stopped production. While the situation has stabilized a lot in China, there is still a lot of uncertainty in the US and Europe regarding when full-scale production will commence again. However, at the same time, several manufacturers including General Motors in the United States are using their engineering, assembly, and procurement capacities to produce and source medical equipment. Even if production begins in stages at some points, the companies need to address the combined challenges of halted production and falling demand. The uncertain near term outlook also requires the companies to remain as agile as possible. Moreover, halted production will have a severe impact on employment all over the world. RBC Capital Markets warned in March that the ripple effect of Coronavirus on consumer demand could send production down by as much as 16% globally.
Managing production decline in the automobile industry
Managing the effects of Coronavirus on production will also be a significant challenge before the car industry. The car manufacturers should stay in close contact with their suppliers to ensure that they can quickly ramp up production as the markets start recovering. Companies will also need to adopt precautions to ensure the health and safety of their employees. They will need to plan work processes in a manner that allows for physical distancing on work. Companies can also hire specialized cleaning companies to sanitize facilities. Embracing the industrial IoT concepts will also help increase efficiency and prepare shock protocols. The auto manufacturers should also consider establishing manufacturing resilience in order to accelerate the shift when things need to be brought into the emergency mode.
Another major challenge before the automobile industry is related to liquidity. The Covid-19 outbreak is also expected to have a severe impact on the global economy and the credit markets. In such a situation, the car manufacturers would be required to consider their cash, liquidity, and working capital strategies carefully. The disruption of the automobile supply chains will also likely trap cash that could otherwise be used for funding operations, providing relief to employees and for managing third party financial commitments better.
Some car manufacturers have low liquidity. The drop in demand will lead to a decline in cash inflow. However, the manufacturers still need to pay their short term liabilities and employee salaries. The remaining cash reserves will most likely be depleted within a few months. As operating cash flow depletes during the crisis, several car manufacturers will likely face liquidity issues soon. Preventing job losses and bankruptcies may make government intervention necessary.
Managing the liquidity challenge -
Companies will update their near and long term forecasts in light of the impact from Covid-19. However, company management should confirm that all the required analyses are completed and controls executed for identifying and addressing potential accounting issues in a timely manner. Companies can also address liquidity challenges through rigorous forward-looking stress testing and sensitivity analyses of the cash flow statement. Management also needs to ensure that it has real-time visibility into access to funding including funding from the alternative sources. They should adjust financial hedges based on operational changes for mitigating liquidity risks. Companies also need to establish tactical cash and working capital framework on a priority designed especially for absorbing commercial shocks. Apart from that, the companies should analyze their capital allocation and budgeting their programs to assess their impact on cash and liquidity. Cost containment strategies can also help car manufacturers manage their cash flow.
Declining vehicle sales:
Another major challenge that will have a severe impact on the revenues and operations of car manufacturing companies is the decline in vehicle sales worldwide. China is still the largest market for light vehicles in the entire world. However, during February 2020, sales of light vehicles in the Chinese market declined by 80% compared to January. This is a strong indication that the world market is headed southwards and its impact is already getting visible. According to forecasts, the sales of light vehicles globally will fall by around 12% in 2020. The likelihood of these circumstances changing soon is very low. Sales forecasts have estimated a decline of 9% in the US in the sales of lightweight vehicles. Moreover, prolonged lockdown is also expected to change consumer behavior and people are expected to continue to shop more online and use less mobility even after the crisis has passed. Another important thing is that the economic uncertainty caused by the Covid-19 outbreak will have an impact on consumer demand in the short term. Apart from not spending on new vehicles, consumers can also likely defer nonessential maintenance of vehicles.
How will the car makers manage declining vehicle sales?
Car manufacturers should use online and mobile channels to stay connected with their customers. They should consider implementing the Tesla model. Tesla uses online channels mainly for sales. It mainly showcases cars and technology inside the stores. Customers can order and customize tesla cars online. Trade shows are canceled worldwide. In such a situation, car brands can use virtual tools for creating virtual event platforms. They must also consider a sales process that is contactless in order to meet the health and safety requirements. Companies will need to rethink their sales strategy and the use of sales channels. Apart from embracing digital sales channels, the companies also need to consider direct sales models. Since dealers will need to reduce their inventory, there will be significant pressure on the prices after the crisis has passed. However, companies should consider discount policies to balance volume and market share as well as profitability and brand image.