The road ahead: What role will new technologies play in helping the automotive industry gear up for change?

The automotive business is notoriously cyclical. For private customers, cars are a big-ticket purchase, easy to postpone if the immediate future looks uncertain. Businesses can follow the same logic, running the vehicles in their fleets for longer when times are tough, and replacing them as demand picks up.

For automotive supply chains, modifying to meet the ebbs and flows of demand is a continual juggling act. In the last big economic slump – precipitated by the financial crisis of 2007 and 2008 – storage lots, ports and disused airfields quickly filled up with unsold vehicles. More recently, customers faced long delivery lead times as manufacturers struggled to ramp up the production of popular vehicles, with delays exacerbated by shortages of electric vehicle batteries and other hard-to-make parts.

Then 2020 arrived. The coronavirus pandemic has not been a “normal” crisis for any industry. For the automotive sector, global lockdowns and the ensuing economic shocks resulted in disruption to both demand and supply on a scale unprecedented in peacetime. In February, Ralf Speth, Chief Executive of Jaguar Land Rover, told journalists that his company was being forced to fly in parts from China in suitcases, as the country’s containment measures halted production and severed logistics links with critical suppliers. Within a month, public health measures had forced the closure of assembly lines and vehicle dealerships across much of the world. With millions of potential customers confined to their homes, and jobs in jeopardy, demand in key markets collapsed.

By the middle of the year, the picture looked bleak. According to the European Automobile Manufacturers’ Association, an industry body, passenger car sales in the region fell by 41.5% in the first six months of the year. In the U.S., major carmakers reported sales in the second quarter of 2020 some 30% lower than the previous year.

Data from a period of enforced shutdown is a poor guide to the longer-term health of an industry, which is why analysts have been watching sales and production figures particularly closely as the world’s major economies emerge from lockdown. That data has painted a decidedly mixed picture.

China, the first country impacted by the pandemic, was also the first to emerge from it. In the world’s largest car market by volume, the industry has enjoyed the V-shaped recovery that industry executives will have been hoping for. July passenger car sales in the country were 16% up on a year earlier, with four successive months of growth making up for much of the year’s earlier declines.

In Europe, volumes have bounced back significantly from earlier lows, but sales in most markets are still below the corresponding figures for last year. And with lockdown measures having lasted longer and ended later in Europe compared with Asia, market watchers are struggling to differentiate underlying trends from delayed demand. In the U.S. meanwhile, where COVID-19 case numbers remain stubbornly high, passenger vehicle sales were still almost 20% down on the previous year in July.

Over the year, forecasters expect worldwide sales for passenger vehicles to be around 70 million units in 2020, a 20% drop compared to 2019. They expect the pain to be unevenly distributed, however, with the U.S. seeing a dip of around a quarter, while Europe, China and other big Asian markets fall by about 15%.

If there is still uncertainty over the pace of the automotive industry’s post-crisis recovery, there are even bigger questions about its form. This was an industry, after all, that was already undergoing disruption before the pandemic struck. What impact will this year’s slowdown have on the sector’s ongoing shift to electric propulsion, and its pursuit of autonomous driving capabilities and other advanced, connected features?

If the early signs are anything to go by, this crisis is set to put some of the most important new trends into overdrive. Analysts at the International Energy Agency expect 2020 global sales of electric and hybrid vehicles to broadly match last year’s numbers, for example. That will be an impressive result against the backdrop of the pandemic, and considering that government subsidies for new energy vehicles have been gradually shrinking in recent years.

Sales of cleaner vehicles are set to receive a further boost in the coming months as a number of governments reintroduce or extend their subsidy schemes as part of wider efforts to stimulate a “green” economic recovery. China, for example has postponed the phaseout of a support scheme from this year to 2022, while Germany has doubled the value of its EV subsidy grants.

Jürgen Stackmann, VW’s former Head of Sales, Marketing and After Sales, told journalists that his company’s existing electric vehicles were “sold out” by July. The company says that, in the week orders officially opened, it received 37,000 reservations for its new ID3 model, the first VW to be built on a dedicated EV platform.

The pandemic is also set to accelerate the evolution of e-commerce in the automotive world. Carmakers have long used smart internet tools such as online configurators to attract customers. Most, however, still rely on their networks of physical dealerships to handle the final sale, delivery and aftermarket support of their products. This year, with many dealerships forced to close, and customers reluctant to make unnecessary trips, the appeal of a contactless, online sales process is becoming overwhelming. Peugeot Société Anonyme says it aims to sell more than 100,000 cars a year directly via e-commerce, and Daimler says it expects a quarter of all passenger car sales to move to the internet by 2025. In Germany, VW says that customers will pay the same price for its new electric models, regardless of whether they buy in person or online.

The coronavirus crisis could also provide a boost for carmakers that few would have expected a year ago. With physical distancing measures set to be the norm for months or even years to come, travelers are wary of cramped trains, subways and buses. That could lead to a resurgence in car use for urban transportation.

Research by consultancy BCG found that a majority of city dwellers worldwide saw private car use as much lower risk than public transport in the post COVID-19 world. The same research identified significant regional differences in people’s expected response to the pandemic, however, with only Chinese consumers saying that the crisis was much more likely to make them use, or own, a car.

In Japan, mini vehicles designed for use in dense urban environments have been one bright spot in an otherwise difficult automotive sector. The category, which includes cars with a maximum engine size of 660 cc, dipped only 1% in July, while the mainstream automotive market plunged by a fifth. Mini vehicles now account for almost 40% of the country’s passenger car sales. In China, manufacturers and suppliers have rushed to respond to public health concerns with new products, including enhanced air filtration packages and air conditioners with UV sterilization systems.

Carmakers hoping for a boom in sales to urban customers may not have it all their own way. Providers of alternative transport technologies also see the pandemic as a chance to seize a bigger share of the market. Bicycle retailers in Europe and the U.S. have reported a surge in interest since the start of the crisis, with demand in some categories greatly exceeding supply. According to Germany’s Zweirad-Industrie-Verband (ZIV), sales of electrically assisted bikes increased by 15.8% in the first half of the year. And in the U.K., the government has brought forward trials of electric scooter sharing services, originally scheduled for 2021.

If the form of the post-COVID-19 mobility market is not yet clear, carmakers face further uncertainty behind the scenes. The steep, and potentially prolonged, fall in sales has left many short of cash. In a research note, Joe Vitale, Global Automotive Leader at consultancy Deloitte, suggested that auto companies “may be forced to divert capital to shore up continuing operations, starving R&D funding for advanced technology initiatives and other discretionary projects.”

Financial pressure might slow the industry’s technological revolution, but Vitale adds that it could also accelerate strategic decisions to exit unprofitable markets and vehicle segments. Early evidence suggests that the fallout from the crisis might force further divergence between global car markets. Manufacturers in China and Europe are doubling down on their ambitious alternative energy programs, pushed by regulatory pressure to reduce fleet-wide emissions and aided by government stimulus. North American players, by contrast, may see more value in doubling down on the popular and profitable light truck and SUV segments.

That polarization could extend into supply chains too. “Nearshoring was already a big topic for the industry before the crisis, as manufacturers sought to reduce risks and increase responsiveness,” says Fathi Tlatli, President, Global Auto-Mobility Sector, DHL. “Sourcing components more locally may be seen as even more advantageous, as product portfolios diversify further along geographical lines.” Supply chain risk is also back at the top of the agenda, he notes, as companies restart disrupted production lines, and as the downturn puts some suppliers under acute financial stress.

The industry may be in for a bumpy ride, but Tlatli believes that it will survive this crisis as it has those of the past. “Modern automotive supply chains have proved to be remarkably flexible,” he says. “We saw that in the heart of the crisis, as companies retooled their factories to make ventilators or protective equipment.” While the transition to the next “new normal” for carmakers may take some time, he is confident that the sector will ride out the storm. “We will see some consolidation in the industry, and some rationalization in product portfolios, but ultimately, the desire for mobility is a fundamental part of human nature.” — Jonathan Ward

Published: December 2020

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