The Road to Recovery: How the automotive industry can come back from Covid-19.

The automotive sector is one of the largest and most complex industries in the world, but it also represents something much greater - the infrastructure of modern humanity. It can be argued that without vehicles, most aspects of modern life would come to a complete standstill. Even the oldest cities in the world are now almost completely reliant on vehicles. And without cars, lorries, vans, and trucks, the shipping and fulfilment industries would be set back by a century.


All eyes are now on the original equipment manufacturers (OEMs), regarding their drive to develop the industry in order to meet environmental expectations; this is not the full story though, as changing consumer demands may drive a different outcome to those planned by the traditional manufacturers.


A Shift in the Industry-slow acceleration-

COVID-19 is not the only challenge the auto industry has faced in recent years. The continued evolution of the electric vehicle (EV) category has presented the industry with a whole new range of challenges, opportunities, and solutions, at a time when many of them are struggling to just keep their assembly lines rolling. To say that this is an industry that is still figuring things out is an understatement.

Here in the UK, the auto industry has suffered heavily during the COVID-19 pandemic. Over a period of several months, the majority of manufacturing facilities were shut down completely, creating a ripple effect in everything from labour to supply. The silence coming from these shuttered production lines was deafening. Thankfully, things began to turn around at the tail end of 2020, as manufacturers started getting back to business.

In the UK, COVID-19 wasn’t the only player in town – Brexit has also played its part in supply chain disruption, exacerbating the global supply chain issues. Getting components into the UK became more complex than before, slowing supply chains and adding uncertainty in lead times. These supply chain issues have been further compounded by restricted shipping options and weather. Many of the major manufacturers experienced accelerated summer shutdowns and are rationing their chips to focus on high value model types. If a consumer was in the market for a top of the range Range Rover, they were probably able to get their hands on one. If they were looking for an Evoque, the outlook was far less promising.


The Forecast Dims-

Beyond the UK, manufacturers worldwide have begun focusing their energy on manufacturing higher margin, premium models; or scaling back on the bells and whistles available on the more mainstream models, to reduce chip requirements. Cost inflation, supply chain hiccups, and issues with shipping have resulted in wait times of anywhere from 6 to 12 months, or more for some models. Due to extended lead times in the industry, some consumers have simply decided to put off a vehicle purchase. This obviously does not bode well for the industry.

Ironically, on the dealership side things are much rosier. In the UK and more widely, employment and sales have remained relatively stable due to government interventions and through changing business practices. Many dealerships have transitioned to a more digital or online sales model, and their costs have dropped, despite demand far exceeding supply. To counteract this, dealers have moved heavily into the second-hand market, sometimes selling cars that are 7 – 8 years old (which was virtually unheard of among larger dealers in recent history).


What about EV?

The move towards hybrid or electric vehicles (EV) is still not gaining the traction that it needs. Despite the emotional or environmental benefits of EV, the economics for the individual buyer still do not quite make sense. In the minds of many consumers, the benefits from electric vehicles do not justify the price tag. There is also some reticence around the pace of the technology evolving. With customers left thinking ‘If I buy an electric or hybrid vehicle now, will it be completely obsolete – and therefore unsellable in two or three-years’ time?’.

Just like the videotape debate of the 1980s, nobody is sure what technology will survive the test of time. Nobody wants to be saddled with the Beta-Max of vehicles. Just weeks ago, the UK government launched investments into both EV batteries and Hydrogen. Toyota is working on a solid-state battery, which could shake things up. It seems the entire auto industry is investing significant time and money in EVs, but there is very little consistency in terms of the technology. Much like the mobile phone industry, each EV brand has its own proprietary technologies, charging stations, cables, ports, etc. This creates hesitation on the part of the consumer especially with multiple charging suppliers added to the mix.

There are a lot of interesting and exciting new technologies on the rise, but consumers are not necessarily lining up to be early adopters. Would you feel comfortable gambling tens of thousands of pounds on technology that may be obsolete in 18 months?


Shipping rolls on-

While EV is facing challenges, the commercial van market has done very well. Fulfilment the world over has had to downsize. Smaller loads mean it is easier to license drivers and builds greater flexibility. HGV driver numbers have been falling globally and there are shortages in most western economies currently, therefore logistical operators have had to change their delivery models to fit the available workforce. The move online has created a huge demand for hubs and the ability to deliver around these hubs. This is also echoed across the European Union, as HGV drivers are disinclined to move across borders with potentially complex quarantine restrictions. Drivers suddenly felt apprehensive about crossing borders. Nobody wanted to get caught during a lockdown and stuck in another country, far away from their families and their homes. It is not likely that there are many people who would be eager to quarantine themselves in a hotel room for 14 days.


Getting back up to speed-

There is not much more the auto industry can do but wait patiently for the world to return to some semblance of normality. Myriad factors, from chip shortages to national disasters, are affecting production. The tragic flooding in Germany recently took place in a region that is heavily manufacturing-focused. In the US, the cold spell of 2020 impacted manufacturing as well, as plants were shut down for an extended period. Around the world, other countries with strong vehicle production facilities (such as Vietnam and Thailand) also shut down due to COVID-19.

Manufacturers the world over are doing their best to get supply back up and running, but with COVID-19 variants running rampant, this has been a challenge. The impact has been particularly hard on small to mid-sized businesses. Nobody knows what they will be able to produce because nobody knows whether all the required components will be available.

There are so many questions these businesses must ask themselves. Tier 1 and Tier 2 manufacturers are unable to clearly plan their workforce needs, and how well they can balance their cash flow with uncertain demand. Do they build for stock to ensure they can meet demand when the industry builds pace, or do they slim down to reflect their current sales? Either way, strong communication along the entire supply chain is what will be required.


It's a seller's market-but there is no supply-

As for consumers, there are even more questions. Most commuters obviously cannot replace a car with a bicycle, so what are their options?

In the UK, the impact of uncertainty over semiconductors could continue well into 2023. Whatever the timing ends up being, we know that things will get back to normal, albeit slowly and gradually. That uncertainty in demand is going to take a while to get over, and it will continue to put pressure on Tier 1 and Tier 2 manufacturers.

OEMs have taken to talking about risks within their supply chains. Who are the suppliers at risk? What do they supply? How can we help them? Do we need to do more stress testing? If there is a silver lining to COVID-19, it’s an increased awareness of the complexities of the automotive supply chain. When one link fails, the entire chain can fail.


Uncertainty ahead-

There have been many factors that are responsible for the current situation the automotive sector is in. Fortunately, this is a historically robust industry that has been innovating at a near constant rate. It may be advantageous at this stage for manufacturers to work together to weather some of their shared challenges. Or perhaps one will figure it out and provide a model for the others to follow suit. Whatever the case, humanity’s dependence on this industry requires solutions sooner rather than later. And in their corner, some of the brightest minds and engineers in the world are ready to step up to the challenge.


Source: RSM.com