The coronavirus outbreak has the potential to reshape the auto industry in ways that go far beyond the short-term effects on sales and production.
As automakers groan under the load of fixed costs with little or no revenue, investments in future trends such as self-driving cars have been trimmed or refocused.
Online sales, once seen as a niche that would never replace the dealership experience, may be getting a second wind. Projects and capital expenditures that aren't contributing to the immediate bottom line have been delayed.
On the factory floor, employees are adapting to safety procedures more often seen in a laboratory, and white-collar workers have learned how to work from home productively.
On a broader level, some of the industry's deepest-held beliefs about globalisation and supply chains are being put under pressure by the pandemic. Consolidations and collaborations are taking on a new urgency, and the shift toward electrification might accelerate further.
"Covid-19 is hitting the industry just as we're seeing a transition from the old traditional value tools and profit pools into completely new ones," said McKinsey senior partner Andreas Tschiesner, who leads the consulting company's automotive practice in Europe. As such, he said, the pandemic will act as both an accelerator and a stress test for existing trends and future business models.
14% – Reduction in planned vehicle production starts this year
54% – Estimated global capacity utilisation rate in 2021, down from 62%
75% – Potential car buyers who say hygiene is an important consideration
12.5% – Loss in productivity per shift because of increased hygiene measures at plants
20% to 25% – Predicted decline in 2020 global vehicle sales to 70 million
Tschiesner and other analysts predict that the global auto market will be smaller, with sales and production in a prolonged slump. In 2020, both are likely to be down about 20% to 25%, meaning roughly 70 million passenger vehicles will be built and sold, compared with more than 90 million in 2019 – and more than 94 million in the record year of 2017.
Prospects for a recovery are uncertain. Many countries and automakers will put in place incentives, in the form of scrapping programs or “green car” bonuses financed by governments or cash-back and attractive financing on the dealership level. But much depends on consumer confidence and on health issues such as a “second wave” of coronavirus infections, and whether a vaccine or antibody test can be developed.
IHS Markit expects that it will take until 2024 or 2025 for global sales to return to pre-pandemic levels. Even then, volumes will remain around 10 million vehicles below IHS’s previous forecast track, which showed production reaching nearly 104 million vehicles in 2027.
“Clearly the slump is very bad. It's much worse than we saw in the global recession [of 2008-09]," Colin Couchman, executive director of global sales forecasting at IHS, said in mid-May. “We're in uncharted territory in many ways.”
To deal with this uncertainty, IHS and other analysts have been gaming out situations. In IHS’s best case – robust incentives, no “second wave” virus and a return of consumer confidence -– the industry recovers by 2022. In the worst case, recovery is pushed beyond 2025. Tschiesner of McKinsey expects a recovery around 2023.
UK dealerships have been told they can operate a 'click and collect' service where customers can pick up cars they purchased online. Pictured is a Fiat dealership in Norwich, England.
But as much as the crisis has staggered the auto industry, it is also inspiring a new agility, analysts and automakers say. A case in point is online sales, which have been promoted for years with little traction in part because of resistance from dealerships seeking to protect their margins. With potential car buyers unable to kick tires or go for test drives, automakers rushed to set up or enhance online platforms, create virtual walk-arounds and offered the option of home or “contactless” deliveries.
“There is every reason to believe that click-and-collect and home delivery will be the dominant methods of trading as we emerge from lockdown, and that showrooms will become more like fulfillment centers where vehicles are processed,” James Tew, the CEO of iVendi, a UK company that provides software for online vehicle sales, said in an article on the company’s website in late May.
Tschiesner said that a faster transition to digitising the “customer journey” will pay dividends for automakers, starting with the supply chain.
“The future is going toward online,” he said. “Automakers want a direct touch point with consumers, because what we also see in the future is that the business model will change toward recurring revenues, software updates and monetisation of data offerings, like Tesla is doing.”
They can also use data from online model configurators, even if they don’t result in direct sales, to better plan their model lineups and fine-tune supply chains, saving money in the process, he noted.
Another potential positive is that recent surveys show people are wary of using mass transit, which could boost the sales of both new and used cars among urban dwellers or young people, for instance. It could also give a boost to automakers’ slow-starting subscription models or long-term rental programs. “The personally owned car may gain in significance with social distancing,” said Mario Franjicevic, an expert in future mobility at IHS.
Early post-lockdown studies in China show that private cars, walking and bicycling have gained while bus and subway ridership has fallen, McKinsey said in a report.
A survey by Capgemini found that 45% of people under age 35 -– a group that has seen falling rates of car ownership – were considering a car purchase this year, compared with 45% of all people. And 75% of all potential buyers said that hygiene was an important consideration this year.
With a 26% decline in April sales, Tesla was among the best performing brands in a European market down 74% for the month. Tesla was helped by strong demand for the full-electric Model 3 (shown).
EVs poised to gain
Many of those buyers will be considering zero- and low-emissions vehicles, which were already getting a push this year from tougher EU emission standards that took effect on 1 Jan.
There is some concern that hard-hit consumers will avoid expensive EVs, but government incentives meant to revive pandemic-stalled demand, such as France's offer of up to €12,000 ($13,200) for a battery-powered car, will offset some of those costs. The incentives effectively create price parity between electrified cars and those with gasoline or diesel powertrains.
“EV adoption is probably going to keep rising and not even dip, which is quite remarkable,” said Colin McKerracher, head of advanced transport at BloombergNEF, a research service. “We think EV sales will probably hold up better than combustion vehicles and rebound faster,” he added.
Bad news for AVs
Autonomous vehicles, meanwhile, may suffer a double hit from the pandemic. Automakers were already dialing back expectations for AVs before Covid-19 struck because the complexity of self-driving cars makes them too expensive for private ownership. Therefore, the focus has shifted toward fitting the technology in robotaxis and other shared mobility options. The need to conserve liquidity to cover fixed costs is making it hard to justify those investments, automakers and analysts say.
“We believe that there is potential that investments are cut because of difficult economic situations, which could delay mass adoption” of self-driving vehicles, Franjicevic said.
Now, for hygiene reasons, potential riders may be reluctant to get into a robotaxi that has been used by numerous people earlier in the day,
“Also, more significantly, the AV purpose will shift to moving goods from moving people,” he said, as online shopping grows.
A number of auto companies have said publicly that they are putting autonomous vehicle investments on hold, with profits from the technology years away.
“If you delay autonomous investments for Level 4 and Level 5 capability by six months, you have not lost the market, since this market will only emerge in 10 years,” Continental chief financial officer Wolfgang Schaefer said at the supplier’s first-quarter results conference.
Companies such as Waymo have said they are losing months of autonomous testing because of social-distancing rules that prohibit the usual two safety drivers.
Ford has delayed the introduction of a commercial self-driving service by a year. “Given the challenges of the current business environment, as well as the need to evaluate the long-term impact of Covid-19 on customer behaviours, Ford made the decision to shift the launch of its self-driving services to 2022,” the automaker said in a statement.
But others said they are staying the course, including Volvo. “We have clearly stated we will keep the priorities that we have set [in areas such as electrification and autonomous driving] and in some cases we are even accelerating,” Chief Technology Officer Henrik Green told Automotive News Europe in May.
'Do we really need that?'
The enormous outflow of capital during the crisis -- a recent Bloomberg article estimated that the auto industry had gained access to $155 billion in loans and other sources of liquidity -- is also accelerating trends toward consolidation, collaboration and cooperation, analysts said.
For suppliers, that means deciding what to do with legacy or commodity products such as internal combustion and transmission components, and even somebody-in-white modules. “We call it the ‘last man standing’ strategy,” Tschiesner said. “On combustion-related technologies, the only way to be successful is to drive down the cost curve, and that has to do with scale.”
For automakers, that means looking at their model offerings. “Every automaker will be looking at the portfolio and saying, ‘Do we really need that many variants, powertrains, vehicle forms, transmission forms to serve the global market'?” Tschiesner said. “I think we'll see a drastic reduction on the portfolio side.”
Justin Cox, an analyst at LMC Automotive, said: “Even before coronavirus, automakers were reviewing their ranges and products. This has focused the mind on what sort of projects should proceed, especially risky ones.”
A few existing projects, such as Lincoln’s work on an electric pickup in the US, have been killed, but most have so far suffered only delays, Cox and other analysts said.
IHS predicts that out of 458 global starts of production expected in 2020, 393 will take place, a 14% decline.
The issue of what to do with overcapacity, already a problem for automakers, is also expected to worsen. LMC Automotive estimates that capacity utilisation in 2021 will be just 54%, around 8 percentage points less than originally forecast.
So far, there have not been any factory closing announcements tied to the coronavirus crisis, with automakers and suppliers just taking the first tentative steps toward reopening -- with a new way of working to prevent infection.
Working apart, or from home
Production lines are being modified to keep workers apart, with plastic shields, curtains and full protective equipment. In some cases, procedures are being modified to maintain distancing. Equipment and tools are being disinfected regularly, and thoroughly cleaned between shifts.
Those procedures could mean about a 12.5% loss in productivity per shift, analysts say, a point that may not be important for now, with demand remaining depressed. “’Full capacity’ is likely to be significantly changed,” said Mark Fulthorpe of IHS, who added that an hour per shift would be dedicated to maintenance and hygiene.
At the same time, “work from home” for white-collar workers is increasingly being seen as a long-term solution rather than a temporary remedy. PSA Group, which had been pushing many workers to telecommute before the crisis, said it would make the option available to 80,000 of its 200,000 employees worldwide. Yann Vincent, the group’s director of human resources, portrays it as a quality of life issue that will allow workers a greater choice of places to live.
Mercedes-Benz workers at its US headquarters will work from home until the end of this year – and possibly longer, US CEO Nicholas Sparks told Automotive News Europe sister publication Automotive News in May. "We are able to function effectively and it gives people an opportunity" for better work-life balance, he said, describing the policy as a "trial" without a firm expiration.
Tschiesner said he was surprised at how well the auto industry took to telecommuting, and said it would have benefits in the future. “The digital way of working has gone smoothly,” he said, adding that it has meant shorter, more productive meetings and faster decision-making.
“I hope some of the top managers are saying, ‘Let’s keep some of the good things from the crisis in terms of being faster.' The automotive industry in the past was relatively slow in analytical things, such as decision-making, because of lots of pre-discussion. I think now we're seeing a completely different management style.”
Because the pandemic is not over, automakers, suppliers and analysts are hesitant to make predictions. All agree, however, that there are opportunities and lessons to be learned as the industry struggles to navigate shifts in powertrains, profit centres, ownership and connectivity.
“The level of structural change at this point is tremendous,” Tschiesner said. “In a way, the coronavirus crisis could be a catalyst event, that this transition is managed faster and even more focused."