Has COVID-19 changed the auto industry forever?

After months of lost production and a decline in demand for new vehicles, automotive manufacturers and suppliers face the prospect of a prolonged recovery. How will the post-pandemic world look for car makers?

OEMs and suppliers were hit hard and fast by COVID-19

The COVID-19 pandemic hit the global automotive industry in multiple ways. New car sales and registrations fell from March when lockdowns and restrictions started to be introduced. In terms of production, factory shutdowns resulted in at least two and a half million fewer vehicles being produced in Q2 compared to the same period in 2019.

When their revenue dried up almost overnight, car makers faced a cashflow problem due to their very high fixed cost base.

To survive during the crisis period, OEMs and their suppliers collectively borrowed an extra 155 billion dollars.

The factories are now open again albeit at a reduced capacity. However, according to some estimates, OEMs are losing an estimated 12% efficiency due to hygiene protocols requiring larger workspaces and more frequent cleaning of tooling and equipment.

Reasons for optimism

Nevertheless, there are some grounds for optimism. April seems to have been the low point for production and sales. Since then, there have been some signs of improvement with improving sales figures since June.

In terms of production, most manufacturing plants are operating, which will go some way towards making up the shortfall. And stock levels are good, partially due to cancellation of short-term rental volumes as well as the general lack of demand.

OEMs will respond by saving costs to reduce the COVID-19 impact

OEMs will need to address their revenue and cost issues. Most are responding to the combination of high inventory levels and ongoing demand uncertainty by building cars to order, and many have scaled down to a two-shift system.

The industry has been consolidating for several years now. This trend is set to continue in the wake of the pandemic, with new partnerships between OEMs emerging in the quest for economies of scale. If the PSA/Fiat Chrysler merger is approved, for instance, the company will account for a 22-25% market share. Likewise, the alliance between VW and Ford is aimed at sharing the costs of R&D and platforms.

We are also likely to see consolidation in product portfolios to eliminate low-volume, low-margin models. For example, Renault is seriously considering a focus on just three models (Scenic, Espace, Talisman), while Volvo’s electric arm – Polestar – has simplified the number of configurations of the Polestar 2 to offer just 315 variants (compared to 9 million variants of the Jaguar I-PACE).

The effect on investment

In an immediate response to the coronavirus crisis, OEMs stopped all R&D investments that would not deliver results in the short/medium term. The figures show that car manufacturers will spend roughly 17% less on research and 13% less on development in 2020, and this trend is expected to continue in 2021.

Longer-term projects such as autonomous driving and hydrogen fuel cells will bear the brunt of these spending cuts. For example, Mercedes Benz has halted its development work on hydrogen fuel cells for passenger cars since it does not regard it as a viable solution in the short/medium term.

However, investments in electric vehicles (EVs) continue to grow due to the enforced push towards electrification as the result of tighter CO2 legislation and targets in many of the largest global markets.

All EV powertrains (BEV, PHEV, EV, HEV) have grown both in volume and percentage terms during the crisis, whereas markets for alternative fuels, diesel and petrol have all declined. In fact, the COVID-19 pandemic is likely to accelerate and intensify the transition to electrification as well as stimulating OEM partnerships such as the one between VW and Ford mentioned above.

The impact on sales models and markets

The lockdowns during the COVID-19 outbreak created a peak in online ordering and digital transactions. OEMs have been quietly exploring direct online sales models for some time, not least because it gives them much-needed control over the margins. This trend is now gathering pace, with current examples including Tesla and Polestar. By accelerating this shift, the COVID-19 crisis has reduced the barriers to entry to the automotive market. We are therefore likely to see many more new OEMs (mostly from China) entering the industry, almost all of them working with a direct sales model. Buying cars online may become more common.

Accelerating change

COVID-19 can be summed up as an accelerator of change, which means that OEMs themselves must show an accelerated response. As a result of factory closures and shelved investment plans, we can expect to see a reduction in factory numbers and further consolidation in pursuit of efficiency. The reduction in R&D budgets is unlikely to affect electrification, but it will cause further delays in the shift to autonomous vehicles. Lastly, we believe that online channels for direct sales will reduce the barriers for new market entrants, resulting in even more competition and cost pressure for traditional OEMs.

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