This review of thought-leader literature on the future of the automobile industry published in the past four months (July 1-October 15, 2020) reveals a number of differences from a similar, earlier review for the period March 15-June 31, 2020. Overall, the more recent literature is less global in perspective. It is more focused on the implications of the first COVID-19 wave rather than a recalibration sensitive to the early impacts of second wave. If the literature in both periods continues to stress economic havoc but offers few blueprints for a cogent national renewal and recovery strategy, perhaps that is because the Canadian players have headquarters outside this country.
This blog addresses three questions:
- What new normal strategies are key market participants worldwide currently employing and how might an organization apply them?
- What forecasts or scenarios in individual markets (Europe, North America, APAC, Middle East, and India) do you need to be cognizant of as realistic market-change strategies are made?
- What are the best practices and recommendations for business survival?
Trends as the Sector Faces Wave Two COVID
Auto industry sector participants and stakeholders include manufacturers, workers, suppliers, original equipment manufacturers (OEMs) and parts suppliers as well as retailers, customers, financial institutions, post-sales detail customizers, car-rental agencies, and governments. This is a sector with good jobs that has been particularly damaged by COVID-19. It faces survival questions, including what actions investors and governments could take that don’t jeopardize long-term competitiveness.
Among the impacts of wave one COVID are
- In the last six months, auto-making companies worldwide have been forced to close or reduce their activities for health and safety reasons;
- about 95 percent of all German automotive-related companies have put their workforces on short-term work during the shutdown, a scheme whereby employees are temporarily laid off and receive a substantial amount of their pay through the government;
- many auto-retail dealer stores have remained closed for weeks or more;
- the top 20 OEMs in the global auto sector could see profits decline by approximately $100 billion in 2020, a roughly six-percentage-point decrease from just two years ago;
- global car sales have declined between 20 and 30 percent in 2020 and depending on the region, it may take up to four years to recover to pre-COVID-19 levels;
- many individuals have lost their income or jobs, and in some jurisdictions there are few people succeeding in selling vehicles and indeed few people buying;
- there is growing conflict in business vision between horsepower (German, Japanese) versus computing power (Tesla, Apple, digital) automakers.
Business Legacies Affecting Actions During COVID-19 Wave One:
Automakers and suppliers are operating amid decreased demand for the vehicles they produce. At the operational level, the pandemic has accelerated certain developments in the automotive industry that began several years ago. Such legacy-related adaptation and mitigation practices include these:
1. Manufacturing leadership is in certain companies’ DNA: The pandemic has created a new capacity for innovative thinking that has taken some people to a level they’ve never been at before in terms of moving quickly, accepting risk and acknowledging that it might not work out perfectly the first time. One example of innovation from the automotive parts industry is Linamar which turned over and started making health-care ventilators in a matter of weeks, even though they’d never made such a product before.
2. Paradigm shift from offline to online systems: Acceptance of online digital-based production, operations, and traffic is continuing. Sales of new and used cars as well as of vehicle-related services are increasingly becoming platform / digital based. As downstream functions in the industry also experience rapid digital transformation, OEMs will need to redesign their digital retailing strategy and demonstrate more cooperation with partners—automotive and otherwise.
3. The tendency to focus on core activities, rather than exploring new areas: While OEMs may now be concentrating on their core business to keep the lights on, the legacy-laden failure to investigate other opportunities could hurt them long term. Auto-industry incumbents face rapidly growing and hugely inventive tech players—from electronic vehicle (EV) makers to autonomous vehicle (AV) innovators—whose leaps and pivots are leaving their slower-moving peers in the digital dust.
4. Conflicting definitions of mobility: Is the automobile a horsepower business (German, Japanese) or a moving digital platform (Big Tech like Apple and Tesla)? As new product visions and collaboration, former tech rivals are now able to compete more successfully against several new content rivals. OEMs and suppliers are holding intense discussions about their vision, focus and technology investments as they attempt to “future proof” their businesses. Cash-strapped OEMs that want to stay ahead of the innovation curve and adopt either a horsepower or digital future-oriented business model will need to collaborate with former competitors, tech players, and investors as an inescapable fact of life.
5. New product and service business models: Over the past decade alone, the number of auto-industry partnerships have increased by a factor of 40. Slower overall sales are fuelling even more product or service businesses. For instance, some car companies will also become charging point utilities, much like what VW has done. Another example relates to the need for dedicated platform and vehicle architecture to manufacture electric vehicles (EVs). Initiatives here will increasingly involve licensing models or collaborative endeavors like GM’s with Cruise and Honda.
6. Climate change targets: Companies face a legacy of local, national, and international clean air, zero emission and miles per gallon targets. Even while much of life remains in suspended animation during COVID, support for climate-friendly transportation is chugging along. For example, Ford just announced a pledge to become carbon neutral by 2050, and California recently mandated that manufacturers only sell electric trucks within the state by 2045.
7. On-shore versus off-shore sourcing: From 2000 to 2020, mainland China went from producing 5 to 30 percent of the world’s manufacturing value added. The early weeks of the COVID-19 pandemic revealed how complex yet fragile global supply chains have become. Already in February, before the outbreak arrived in Europe and the United States, a supply-induced shock caused production interruptions at many tier-one suppliers, as critical parts from China went missing. The increasing dependence on single-country source of supply, especially China, has grown more visible due to the crisis. If these supply chain links break, the disruptions increase.
COVID Recovery—Both Adaptation and Mitigation Actions:
As they navigate this crisis, automotive industry leaders may gain an advantage by reimagining their organizational structures and operations. Experts and thought leaders identify various moves that can help them during this process. Sustainability strategists speak of adaptation and mitigation strategies. The terminology isn’t widespread in literature on automotive industry futures but I’ve used this helpful dichotomy to organize the various actions proposed for this sector:
Specific adaptation category actions for specific auto businesses have been cited as worthy of emulation include:
1. Address fears of infection: Hygiene and the fear of infection drives the behaviour of consumers, workers, and sales and maintenance staff, and will for an indeterminate while longer. Going to visit a car showroom, entering a display vehicle, or touching potentially contaminated surfaces– all of these activities represent a cause of concern for potential clients. Key importance, hygiene-sensitive sales procedures offered to customers can include:
- (a) clearly structured online ordering,
- (b) digital walk-arounds to demonstrate the vehicle’s features and
- (c) home delivery of vehicles for test drives.
2. Radically focus on contactless or digital sales: Growth in online sales channels is high in every country, but the biggest boost has occurred in Germany, which has seen the use of digital channels jump 28 percentage points in response to the COVID-19 crisis. Moreover, 72 percent of first-time users in Germany and 70 percent of regular users are planning to continue engaging online even after the crisis subsides. Simply put, having an online presence may be a game changer for many businesses.
Within the automotive industry, the benefits of adopting a digital strategy surfaced early in the COVID-19 crisis. In February 2020, China experienced an 80 percent decline in overall automotive sales. One US electric-vehicle (EV) maker increased its sales in China by over 10 percent, however. The company had already established online sales offerings that proved effective during the nationwide shutdown.
3. Sell services, not vehicles: Traditional vehicle sales for one electronic vehicle automaker accounted for roughly $20 billion of the company’s valuation, while software upgrades and over-the-air (OTA) updates contributed more than $25 billion. Software subscription services, which enable people to pay for programs that unlock features from heated seating to full self-driving capabilities, from opening garage doors to starting appliances, allow dealerships to develop an ongoing lucrative relationship with consumers by offering them additional flexibility, lifestyle comfort, and customization.
4. Sell mobility, not vehicles: In times when cash is scarce, jobs are insecure, and uncertainty abounds about the future, customers often hesitate to make large up-front purchases. Instead, many prefer short-term, transportation choices that do not tie up significant capital. Preferences for non-ownership models are often apparent, especially among younger consumers. Before the COVID-19 crisis, 34 percent of Generation Y consumers expressed a preference for rental and ridesharing products, whereas 6 percent of baby boomers shared the same sentiment.
5. Re-evaluate the China-centric supply chain: The automotive industry has taken on an increasingly-global aspect over recent decades, decentralizing not only production plants and the manufacture of vehicles, but also parts and raw materials sourcing, thus creating an increasingly complex network. Production stoppages in China and Asia, and the subsequent lockdowns in the rest of the world have prevented businesses, even in countries yet to have problems with the virus, to be unable to access parts coming from abroad. As discussed in EthicScan blog “Off-shoring versus re-shoring—ethical choice dilemmas” (25 May, 2020), this global business model, effective and flexible in some aspects, has shown itself to be a double-edged sword. Many companies are going back to the drawing board with both sourcing adaptation and mitigation contingency plans, seriously evaluating how to avoid these problems in the future. Supply-chain diversification will open up opportunities for countries like India and Mexico.
6. Lean Product Development Strategy: The COVID crisis has highlighted the overdependence of the auto industry on Chinese suppliers for parts, especially in the electric vehicle (EV) market. Some automobile companies are re- evaluating ideas like reused and shared parts for new product development. This includes cutting back and consolidating the number of trims, variants and powertrains. Meanwhile, Brexit and other protectionist economic policies will favor lean product on-shoring rather than diversified models off-shoring in the future.
Specific adaptation category actions for auto-sector businesses that have been cited as worthy of emulation include:
1. Optimize asset deployment by collaborative partnering: Investments in autonomous technologies, connectivity, electrification, and shared mobility are a challenge for automotive OEMs and suppliers alike. Given the significant resources required and the need to deliver these solutions now, it makes sense for industry players to work together instead of competing alone. After all, the limited resources of traditional OEMs must stretch even further in the COVID-19 crisis as cash-preserving measures and cost-cutting initiatives leave little room for technology investments.
2. Embrace zero-based budgeting: While production lines remain shut down, many people are in short-term jobs or working from home due to pandemic measures. With so many people working remotely, a window of opportunity has appeared that offers fresh ways to manage a company’s profit-and-loss (P&L) statement. Examples include:
- (a) flexible-work locations;
- (b) operating-expenditure savings through physical workplace reductions;
- (c) shift away from an annual budget toward dynamic resource allocation; and
- (d) reconstruct income statements from scratch.
A zero-based approach—rather than basing needs on last year’s investments — can catalyze long-overdue changes in the automotive industry, including the consolidation of production facilities, the elimination of activities that add little value, and the radical reduction of investments in noncritical assets.
Considering the challenges imposed by the pandemic, the airline industry is currently leading the way in applying agile and zero-based budgeting approaches and reconstructing income statements. Experts suggest that automotive OEMs and suppliers should follow suit.
3. Build resilience and security into the supply chain: Companies will need to focus on specific areas to make their supply chains more resilient after the pandemic. This includes performing rigorous checks on worker health and product safety throughout the supply chain, monitoring interactions, and flagging concerns. They need to instill confidence among key stakeholders, restarting operations based on data and analytics-driven demand and supply-chain transparency. Overall, organizations restarting production should not return to business as usual, but should restart with new, faster processes and tools and scaled, agile practices. Industry leaders now have an increased sense of urgency over supply-chain resilience and manufacturers in Europe and the United States are considering backups such as local sourcing.
4. Establish a strong decision-making cadence: Many traditional OEMs are still hampered by organizational silos and a hierarchical decision-making process, which is the opposite of what is needed in a fast-moving world. Experience suggests that company transformations often fail to gain the necessary traction and rigor for successful execution and implementation in the industry’s next “new normal.” Experts who are promoting “organizational cadence” speak of:
- (a) fast decisions;
- (b) execution discipline;
- (c) frequent reviews; and
- (d) clear accountability.
Historically, companies that have emerged stronger from a crisis have one thing in common: they do not hesitate to act when underperforming, even letting go of their top management team if necessary. For instance, one successful automotive OEM replaced 25 percent of its top managers during its transformation, boosting its market capitalization by a factor of four and raising operating profits by approximately ten percentage points within five years.
New Normal Consumer and Product Blueprints and Forecasts:
Many authors forecast that, post COVID, there will be a greater social polarization along age, gender, income, and even political lines. This creates a serious challenge for car companies that have hitherto excelled at segmenting and sub-segmenting both cars and customers. The real challenge now will be not to build more models but to drive greater personalization to deal with more diverse demands.
Here are some thought leaders forecast about vehicles of the future:
1. Built-in health, wellness and wellbeing solution vehicles: As noted in the EthicScan blog “COVID Adaptation Scenarios: Auto Industry” (July 2, 2020), cars are now being built and designed as points of health. Built in, bought in and beamed-in features are converting the car into centers of health, wellness and wellbeing (HWW). Such HWW features include ionizers and ozonizers that purify in-vehicle air as well as self-cleaning car surfaces that will become health-enhancing standard offerings in cars that will benefit both passengers and the immediate neighbouring environment.
2. Cars as an element of connected living solutions: Cars will become an integral part of connected living solutions. The launch of 5G networks in the near future will connect the vehicle-to-home, vehicle-to-vehicle, and vehicle-to-everything. This includes:
- (a) voice recognition;
- (b) personal assistant;
- (c) on route mobility services; and
- (d) cars as marketplaces, allowing consumers to do literally everything—refueling, purchasing services, paying for tolls, activating in-home devices, and much more.
3. Selling connectivity, not hardware: Some auto companies will focus beyond just selling a metallic hardware product to generating continuous revenues across the lifecycle of the vehicle. In their pursuit of value creation, retention and enhancement, automakers will push forward on connectivity platforms that personalize a range of lifestyle offerings and features on demand (FoD) services.
4. Design to dismantle vehicles: COVID will provide impetus to furthering specific automakers’ Vision Zero and Circular Economy initiatives. To date, car companies have been very good in terms of:
- (a) building carbon neutral factories,
- (b) striving for zero fatalities, and
- (c) developing zero emission cars.
But what some experts see as new normal is greater incorporation of use and reuse practices – the ‘Design to Dismantle’ principle – at the design stage itself. Such circular economy practices will anchor the transition towards what industry insiders call Innovating to Zero.
5. Electric and hybrid alternative fuel vehicles: The widespread diffusion of hybrids and electric cars, despite a positive adoption rate in recent years, has yet to reach full potential. Interest in more ecological technologies continues to grow in North America (29 – 41%) despite multiple unfavourable factors (such as relatively low petrol and diesel prices, and less government fiscal incentives). Generally speaking, in all countries (except China, which already has the highest penetration of alternative drivetrains in the world), the share of consumers willing to choose an alternative fuel vehicle as their next vehicle is increasing, while the long-time preference for traditional powertrains is shrinking.
6. Vehicle autonomy or driverless cars: As a result of COVID, the average traveller appears to be less inclined to enter a car used by other people without the presence of a driver who can take responsibility for the cleanliness and disinfection of the vehicle between journeys. Automakers are now contemplating two divergent, less ambitious, approaches in this autonomous vehicle race: first, the Tesla strategy which aims to combine camera-based technologies to make progress, and, second, a proceed-with-caution strategy which seeks to persist with less innovation for a period of time before ramping up. Some experts apply the eternal development vs deployment debate logic to conclude that China (for deployment reasons) will be the first to dash over the finish line.
Here are some significant forecasts about future vehicle consumers:
1. Ridesharing or on-demand mobility consumers: More rental companies and some OEMs are expanding short-term lease offerings as an alternative to car sales. The consumers who might support ridesharing include:
- (a) at-home workers not needing a car to commute;
- (b) companies downsizing their corporate fleets; and
- (c) consumers who feel they do not need a private car, another personal possession, or cannot afford its ownership.
2. Micro-mobility or downsized personal mobility solution consumers: Single or double seaters, like mopeds and scooters, offer fixed income and environment-conscious riders better control over their health and wellness. They are easy-to-use and ideal in congested city environments. With few exceptions, many employees have had their salaries restructured, thus making additional costs difficult to manage, which should encourage the purchase of small city cars, and low-cost hatchbacks.
3. Demand for greater personalization consumers: Coming of age Gen Z customers are digitally adept and want greater personalization, sophisticated technology, and lifestyle-enhancing solutions. This trend will be particularly noticeable in countries like China, India and Saudi Arabia which have young populations as well as the U.S. where car ownership happens at a much younger age.
4. Lower commuting miles consumers: More office and service workers are choosing or being told to work from home. As they have less need to commute daily, the role of their car, which used to be primarily for work commutes, will shift to use on the weekends, evening trips and shorter drives. Such trends will challenge car companies that depend heavily on making high mileage vehicles driven by the workplace commuting. Another consequence of lower commuting miles will be felt in lower aftermarket sales.
5. Company car or van fleet purchase consumers: If managers and employees work from their homes, and manage meetings and work chats remotely, there will be less aggregate need for a company car. Typically, fleet markets have always made gains during a period of recession. The times approaching might be a little different. Hertz’s collapse is symptomatic of the market’s decline. Car allowances might be cut by corporate employers, causing the lucrative corporate fleet market, especially the premium segment, to suffer. A glimmer of hope may come in the form of growth in private leases.
6. Value-conscious and income-challenged consumers: Public transit is often the mode of choice for marginal and disadvantaged populations. Greater fear of travelling in densely-packed buses or trains may force many of these consumers to look to the used car market. Valuations of used car companies are at an all-time high and auction prices for used cars in some locales are forecast upward. Some experts forecast a big shift to digital marketplace models for used cars. So far, Frost & Sullivan has already identified six such platforms with used car sales likely to migrate wholly online over the next 3-5 years.
Automobile Industry Scenarios:
The typical long term scenario methodology applied in this sector involves forecasting economic and production trend data into the future rather than looking at alternative demographic, consumer and sustainability variables in the future, and extrapolating backward to the present. That is, “present to future” trend extrapolation rather than “future to present” alternatives speculation. Lobbyist appeals for public funding, supplements and bailouts in Canada and the US do not seem to be tied to alternative technology or sourcing policy-choice strategies.
Common characteristics and highlights of recent scenario exercise literature includes the following:
- most publicly-available scenario exercises are from consultants (such as Baker McKenzie, McKinsey) or public private collaborations (WBCSD/Boston Consulting, FAIST);
- time horizons are typically five years, not ten to twenty year horizons;
- a full demand recovery will take some time;
- a V-shaped rebound is looking increasingly improbable, as various government assistance initiatives will start to dissipate in the coming months, leaving consumers to face the full reality of a diminished financial capacity;
- the specter of a severe second wave of COVID-19 could result in a consumer retrenchment, truncating economic growth for the foreseeable future;
- new vehicle demand will likely remain suppressed for the next several years;
With travel deeply curtailed by the pandemic, and in the midst of worldwide factory closures, slumping car sales, and massive layoffs, it’s natural to wonder what the “next normal” for the auto sector will look like. With the passing of COVID wave one, we’ve seen the first indicators of this automotive future becoming visible, with the biggest changes yet to come in future waves. “Future to present” scenarios like the one below are discussed in more detail in the EthicScan Knowledgebase.
|ISSUE||VEHICLE OF THE FUTURE|
|One to Five Years||Five to Ten Years||Ten To Twenty Years|
|Design||Connectivity: current figures of less than 40 connectivity features in most high-end vehicles||Health: Shift and wellness properties||Mobile digital platform: over 100 connected car features to be available to consumers across emerging and developed markets|
|Manufacture||Zero emission cars||Design to dismantle||A carbon-neutral new passenger car fleet with plug-in hybrids or all-electric vehicles will make up more than 50% of its car sales by 2030|
|Passenger vehicle Sales Valuation as Proportion of Total Valuation||Sales valuation 40 percent (software and over the air upgrades are 60 per cent)||20-40 per cent (OTA 60 per cent)||10-25 per cent (OTA 75 per cent)|
|Features||Heated seating; parallel parking||Hybrid and electric vehicles||Self-driving; autonomous vehicles|
|Size||Traditional||More mopeds and scooters, and the debut of a new generation of boxy, monolithic models for the growing Gen Z customer segment||Small city cars. low cost hatchbacks|
|Body style||UVs and cross overs were the dominant body styles of the last decade; return of the hatchback||The emergence of new body styles driven either by COVID or the shift to a household second type of car||Teleportation; big shift to digital marketplace models for used cars|
|Luxury vehicle sales||Luxury vehicle sales to decline by 30-35% over the short-term before||Gradually picking up over the medium- to long-term||Reinvent vehicles as mobile digital platform devices|
It might take years for this sector to recover from its current plunge in profitability. Financial strain, supply chain disruptions, and new (and changing) compliance requirements are but a few challenges automotive companies face. The review of mitigation and adaptation initiatives here suggests that there is not certain or agreed-upon evidence about a single Canadian blueprint that will likely chart the future toward healthy workers, healthy suppliers and healthy consumer demand.
FAIST – How will the automotive sector change post Covid-19?:
CISION, PR Newswire – COVID-19 Pandemic Implications for the Automotive Industry, 2020 – Best Practices and Recommendations for Business Survival:
EthicScan Blog – Off-shoring vs re-shoring – ethical choice dilemmas:
Forbes – Top 20 Post-Covid Automotive Trends:
ERNST & YOUNG – Now, Next and Beyond: Auto factory of the future
EthicScan Blog – COVID Adaptation Scenarios: AUTO INDUSTRY:
WBCSD – COVID-19 Business Recovery: A perspective on a sustainable and inclusive recovery in the automotive industry:
Baker McKenzie – Thoms Talks Trade: Spotlight on the Sustainable Future of Europe’s Auto Industry:
SME – Auto Industry Gets Back Into Gear Following COVID-19 Shutdown:
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