COVID Adaptation Scenarios: AUTO INDUSTRY

July 2, 2020 by David Nitkin | Categories: Scenario Development and Testing | Tags: technology

The Issue

The pandemic is roiling global financial markets, putting huge economic relief debt-burdens on national governments, and pushing the international automotive industry to a standstill. This industry includes original equipment manufacturers (OEMs), tiers of suppliers (including tires, electrical assembly systems), sales dealerships, and post-sale equipment, detailing, and parts services, as well as car rental, taxi, ride-share services, and sector workshops (ACEA, CECRA, CLEPA and ETRMA).

Like other industries, automotive is seeing market declines for various reasons. The primary one is that most consumers simply don’t want to buy a new vehicle right now. They are not inclined to make large, discretionary purchases because of multiple uncertainties:

(a) how long the virus will last,
(b) how long their paychecks will keep coming in, and
(c) how long it will take for the economy to recover.

Consumer confidence and the economy are inextricably linked, and both will remain suppressed beyond the short term, says market forecasters, for some 12 to 18 months—or until a vaccine is developed and made widely available.

This blog explores three questions:

What is the industry doing to adapt to COVID?
What trends, forecasts, and legacy-practice barriers affect how and when it will recover?
In what ways could scenarios and change agents emerge that would radically alter the industry’s traditional business model?

Automotive Industry Trends

The industry is centred in three regions: North America, Europe and China. In Canada, the auto industry directly employs more than 125,000 people in vehicle assembly and parts manufacturing, and another 380,000 in distribution and aftermarket sales and service. Worldwide, the industry provides jobs for 59 million people (directly or indirectly) and contributes an estimated $5.5 trillion to the global economy. Consequently, the automotive industry’s feast—or its famine—will have a profound impact that ripples through industries and nations.

In the face of COVID-19, employee health and welfare should be a top concern for corporate leaders. A significant share of these auto workers do jobs in factories where components and vehicles are assembled and so cannot be performed remotely. The changing nature of their workplace has been described in the EthicScan blog, “The Future: Returning Manufacturing Workers“ (May 17, 2020). Design, administrative and sales jobs are more readily capable of being done remotely.

The past decade was a period of exceptional growth for the automotive industry. In 2009, at the depth of the Great Recession, 64 million new, light vehicles were sold globally. That number rose to nearly 90 million in 2019, with China emerging as the single largest automotive market in the world, in spite of the slowdown that occurred in the region during the period 2017–2019. The major changes due to COVID-19 in the past three months include:

Around the world, tens of thousands of industry employees are temporarily out of work, traffic at thousands of dealer locations has stalled, and franchise operators are struggling to make payroll
Most plants are closed with companies like Volkswagen AG and General Motors Co. having sent thousands of line workers home
Consumers in many jurisdictions have been advised or ordered to shelter in place, which presents logistical difficulties for making a large-ticket purchase like a vehicle.
Many markets have seen a dramatic decline in new vehicle sales, some by more than 80%
More than 95% of manufacturing capacity in Europe and more than 90% in North America lies idle while Asian manufacturing is just beginning to come back online
Many dealerships are closed. Those that are not are dealing with strict sheltering-in-home guidelines and outright bans on personal test drives.

Mobility and Industry Forecasts

Industry insiders offer these observations on principal COVID-related changes affecting them:

1. More people will prefer to use a car rather than public transport: Many people are reticent to use crowded public transport on a daily basis to get to and from work. They fear being in close proximity to one another and touching dirty surfaces, and thus exposing themselves and their family to possible infection. This, together with falling oil prices makes car use more attractive, if and when infection abates and a decrease in oil prices is translated to what consumers pay at the pumps.

2. Fewer people will want to buy a car: Job uncertainties, high unemployment, and economic stress will prohibit people from being able to or wanting to buy a new car. Furthermore, the widespread focus on sustainability has had an intense impact on customer sentiment regarding transportation and this will continue to have a downward effect on demand for new, privately owned cars.

3. Fewer commuters on the road: For those who continue to work, teleworking has become the new normal and could remain prevalent once the coronavirus crisis is over. This means that there will be fewer commuters and thus less people willing to pay for an expensive new car.

4. Shared service providers: Given that people will be less willing to use public transport and to buy a new car, there likely will be a surge in demand for shared (and preferably electric) vehicles. In the short term, this will likely be a boon for electric, shared car-service providers such as Ferrovial’s Zity, VW’s WeShare, and Daimler/BMW joint venture SHARE NOW.

Legacy Problems and Challenges

The heart of traditional auto making for 110 years has been mass producing profitable machines, not necessarily consumer-selected, purpose-built ones. Pioneer Henry Ford famously said, “Give them [the customer] any colour as long as it’s black.” Some of the significant legacy consequences and challenges of vehicles made using this business model include:

(a) Health: There is no peace of mind around the product’s attempt to address disease. How does the customer know the steering wheel, touchscreens, etc. are not contaminated? What if asthma and allergy sufferers want a vehicle that cleans the air inside and outside the vehicle?

(b) Ownership: Current vehicles are designed for the private ownership market rather than the ride-share market. Do they deliver what consumers expect? What could be improved if these cars were built, first and foremost, for near-term sharing and longer-term sequential owners?

(c) Overcoming adversity: Current marketing focuses on experience (luxury, machine responsiveness, and road handling). What about serving non-materialistic or physically and mentally challenged consumers – operators, not drivers—who want a driverless, safer, automatic, less stressful form of mobility?

(d) Security, as distinct from safety: Current vehicle design focuses on crash-worthiness. What can service providers—automakers, ride hailing companies, and car sharing companies alike—do to ensure not only that vehicles are safe, but also that passengers are demonstrably secure and feel safe? To successfully address consumers’ concerns, companies must firstly make sure that they understand what consumers care about and, secondly, make service design a priority.

Other specific sector-wide challenges that industry executives face include:

1. Most of factory jobs are close proximity contact: If infections spread and a large percentage of the workforce gets sick, this could drastically reduce production capacity. That means keeping the big picture — a safe, healthy workforce — in focus as what’s right for the bottom line.

2. Not designing for a mobility service: It is no secret that automakers’ traditional strengths and core competencies in manufacturing have caused them to lag behind in how to successfully design for, and capture value from, mobility as a service. To date, most automakers have instead relied on a traditional waterfall design approach beginning with the vehicle and considering mobility service as a mere add-on.

3. Not designing a shared use vehicle: Once upon a time, interactions with a vehicle were limited to those dictated by one owner. Today, reality is more complex. Shared cars will be used by multiple people for multiple different purposes on any given day. Some upstart companies—Chinese/Swedish Lynk & Co, for example—have begun creating cars with shareability in mind.

4. Geopolitics: There are growing tensions between China and the United States on major topics, not the least of which is economic supremacy, trade competitiveness, domestic jobs, and control of supply chains. The industry is an expression of nationalist goals. Transnational companies will have to address large-scale, difficult choices like re-shoring/on shoring versus off-shoring. Theses tensions are discussed in the EthicScan Blog, “Off-shoring versus re-shoring –ethical choice dilemmas” (May 25, 2020).

5. Big Tech: To some analysts, cars are the new smartphones. Big Tech companies like Apple, Google and Tesla are looking to partner with traditional automakers. However, they want be in the brains of automobiles; not in the business of manufacturing automobiles because it’s a low-margin business. Apple and Google have already elbowed their way into the automotive industry with Apple CarPlay and Android Auto. The value they bring to the table are things like in-car tech devices, extended driving range (solar and electric), rideshare apps, and autonomous driving technology.

6. Protect the disease transmission vulnerability of passengers: Safety concerns in luxury automobiles have typically centered around, first, protection from collision and, in countries like Mexico, Russia, and Brazil, protection from attack, robbery, or kidnapping. Now COVID-inspired security concerns include a demand for new features that address infectious disease fears and needs. For example, antibody testing for entry by drivers and passengers, detecting and avoiding routes near real-time, infection “hot spot” locations, and plastic dividers between drivers and passengers.

COVID Adaptations

Many companies report their operational recovery plans to reopen facilities focus on promoting a safe production environment and minimizing the risk of community spread. This includes efforts to:

(a) adjust shift-work structures,
(b) rearrange workstations to add distance,
(c) increase the availability of personal protective equipment (PPE); (d) schedule more-frequent cleaning and sanitization,
(e) monitor the temperature of employees, and
(f) explore the use of new digital tools to assist in infection notification and tracking. Such tools can enable self-reporting, track incidents, and provide real-time infection chain notification, and more.

Here are a selected number of adaptations:

Worker Safety	Product Health & Safety	Business Operations
Invest in education campaigns to help front-line employees know how to minimize the spread of the virus and what to do if they experience symptoms of COVID-19	Introduce technologies that priorize giving operators the freedom of gong places safely	Bolster cybersecurity and system resiliency to better deal with significantly higher levels of remote access to vehicle and manufacturing core systems
Enhance priority given to programs that address factory health and safety practices, including disinfection, sanitation monitoring and testing	Question designers’ preoccupation with the interior as a grand sanctuary (calming mood , ambient lighting, state-of-the-art sound systems, massaging seats, warm and plush trims)	Identify, recognize and reward essential employees, both front line and support workers
Protect and take care of employees, including plans for-workers when a single team member is found to be infected	Invest in pollution fighting cars that come with a plasma-cluster negative-ion generator that sterilizes pathogens, kills mold and bacteria, and dissolves harmful gases in the air	Establish a team to focus on supply chain assessment, risk management and re-shore versus offshore sourcing choices
Follow the most conservative guidelines available among leading global and local health authorities (e.g., CDC, WHO).	Invest in high-end air filtration systems that help remove particulates and pollen (asthma and allergy free cabin)	Conduct scenario planning on how to redirect portions of supply to other sites, potentially even rethinking just in time (JIT) models
Isolate and effectively support (financially, counselling) any infected employees	Apply active charcoal inside the car to remove odors and ground-level ozone	Change modes of transportation, (e.g., pre-booking air freight or rail capacity ; potential switch of airplanes from passenger to cargo freight)
Ensure that remote working is allowed as widely as possible	Design cabins that actively clean a significant amount of air around (as well as in) vehicle	Where possible, leverage production networks to help manufacture and deliver anti-COVID needed supplies like ventilators and masks

Scenario Development and Testing

Industry scenarios typically are two to three horizon years out, finance focused, and don’t deal with radical changes to the current business model. They focus on when traditional demand will be restored rather than what new post-COVID, consumer demands might be satisfied. Given the outlooks for the three major automotive markets (China, the US, and Europe) and current plans for economic stimulus and availability of credit, insiders who craft these scenarios expect a U-shaped global decline and recovery, in general, with a six- to nine-month slowdown for the automotive industry.

One wonders how much more powerful the sector’s recovery might be if auto makers really looked at the shifts in consumer behavior, and designed new mobility solutions based on consumer need, such as form following function, shareability; and active public health promotion features. Here is part of three alternative, fifteen-year horizon scenarios being prepared for discussion at EthicScan workshops.

Variable	Scenario One	Scenario Two	Scenario Three
	Little Change	Significant Change	Pandemic proof
Purpose of vehicle	Car driven as private experience	Car driven with shareability purpose	Driverless low contact vehicle
Production line	Traditional manufacturing factory	More frequent-switch factory lines	More frequent-switch factory lines
Mobility benefits of vehicle	Vehicle designed for single user/family ownership	Vehicle designed specifically for the needs of car sharing	Vehicle that is adaptable, sustainable, secure and improves the environment inside and outside the cabin
Customer appeal	Upscale demographics	Renters as well as owners. Different socio-economic status. Ride sharing services	Asthmatics, health compromised
Infection fighting capabilities	Not inherently built in	Health promotion features as car designed for a multitude of different people	Built in features for detection, prevention and suppression of disease

Conclusion

The challenge for a number of automotive companies is not how to stretch, it’s how to survive. Consolidation and repurposing are likely. Tomorrow’s nimble, surviving automotive companies will be:

(a) able to embrace new ways of working,
(b) meet future disruption by re-engineering global and local supply chains, and
(c) pivot to new business models—including those driven by digitization and electric and autonomous vehicles.

There’s strength to be gained for the future in the adaptations lessons and scenarios companies are applying today.