Many automotive suppliers estimate a subsequent full recovery to take years.
Many automotive suppliers estimate a subsequent full recovery to take years.

COVID-19 PANDEMIC The coronavirus pandemic’s long-term effects on auto suppliers

Author / Editor: Seth Lambert / Nicole Kareta

The coronavirus has taken a toll on the automotive industry, although some parts of it are recovering faster than others. Here is a closer look at the long-term effects of the pandemic on automotive suppliers.

The coronavirus pandemic has produced a challenging business environment for nearly every industry, and the automotive sector is no exception. When the pandemic first hit early last year, auto sales declined. Many, if not all, automaker OEMs shuttered their manufacturing operations for one or more months. Some smaller OEMs, such as China’s Lifan Motors and Zotye declared bankruptcy, while others, such as electric-vehicle (EV) startup Byton, announced plans to furlough staff and substantially restructure in 2020.

Consulting firm McKinsey estimated the world’s top 20 carmakers experienced a profit decline of a collective USD100 billion for 2020, a 6 % decrease from 2018 numbers. Revenue decline is expected to be even worse, with a drastic 20-30 % decrease expected for global automakers for 2020. Looking forward, cash flows may well stay constricted in the medium-term, and—depending on the region—sales may take as long as four years to recover to pre-COVID-19 levels.

Naturally, automotive suppliers (many of which have experienced their own shutdowns, layoffs, and unconventional work schemes) have been impacted by these events, with a subsequent full recovery estimated to take years.

Car sales recovering

In China, an early recovery from the worst of the pandemic saw car sales rebounding from an 80 % decline as dealer inventory shrunk. Government initiatives, including increases in the number of license plates, new-energy vehicle (NEV) subsidies, and incentives for scrapping older vehicles helped the domestic auto industry re-find its footing. In Europe, recovery has been spotty, with Spain reaching its financial bottom in May, France rebounding in June, and Germany following in July, which is when various European automotive-industry stimulus packages began to kick in. In the United States, recovery has been led by the highly profitable pickup truck category, which by the third quarter of 2020 had gained 5.5 percentage points of market share. Still, automakers affected by downturns in sales have in some cases retreated from innovation and instead have turned to traditional core businesses in order to “keep the lights on.”

General trends affecting suppliers

In terms of general trends, employees working from home have meant that fewer cars are needed per family. Mobility-as-a-service (MaaS) businesses, such as carsharing and ridesharing, have seen revenue falloffs of 75-80 %. Fewer miles traveled per automobile have meant fewer repairs for vehicles and less of a demand for replacement parts. In the meantime, sharply lower petroleum prices have removed incentives to purchase EVs.

On the other hand, it’s now been proven that EVs can simplify automotive supply chains. The fear of touching fuel pumps with one’s fingers may boost purchases of EVs, which can be safely recharged at home. It’s also possible that Track-and-Trace initiatives could present new use cases for LiDAR. The fear of contracting COVID-19 via use of public transportation may encourage more personal car ownership. There’s currently a trend of people moving away from dense urban regions to more rural areas where cars are necessities. Higher divorce rates due to extended quarantines have the potential to turn current one-car families into two-car families. And overall, there’s a trend that MaaS use cases have expanded from merely moving people to additionally moving goods.

Business plans and timelines affected

Auto suppliers at all tier levels have been affected as research and development efforts and capital expenditure decisions are being re-evaluated in light of a more fluid business environment. In particular, innovation related to the electrification of vehicles may need to be altered or refocused as forecasters such as IHS Markit anticipate a greater demand for hybrid-powered NEVs, as compared with pure battery-electric offerings.

A survey of automotive OEMs and suppliers by IHS found that the average expected reduction in companies’ 2021 development budgets was at least 8 %, while the average reduction in companies’ 2021 advanced research budgets was 12 %. Approximately 54 % of respondents said that technology deployment delays would be the main impact of the pandemic, while 22 % of respondents said that electric mobility technology would be most impacted. Only 4 % of respondents expected no reductions or delays in development projects, while one in five respondents thought the R&D impact of the pandemic would go on for at least a year. Realities of reduced operational efficiencies, difficulties in staffing, slipping product schedules, and balance sheet issues have led some suppliers to draw on new or rarely used skillsets during the pandemic.

The supply chain for semiconductors, in particular, has been interrupted as demands from the consumer electronics sector clashed with those of the automotive industry when both markets began to recover in the second half of 2020. In China, up to 250,000 product units could be affected by this disruption, while in Europe, 100,000 units could be at risk; in Japan, North America, and India, risks of negative disruption are present as well. According to IHS Markit, there’s some evidence that the outlook for this situation will improve by the second quarter of this year.

Longer-term prognosis

In the longer term, auto suppliers looking for success may want to accelerate the use of online sales channels to connect with OEMs and other customers. Consultancy McKinsey reported growth in digital channel utilization for communications in every country it surveyed in Europe, with Germany leading the way with an increase of 28 % in digital channel use over pre-COVID-19 levels. Respondents to McKinsey’s surveys indicated that 72 % of first-time users and 70 % of regular users plan to continue utilizing digital communication channels after the pandemic is over. For many firms, an online presence is a game-changer, simply due to the fact that the auto industry lags other sectors in the business-to-business (B2B) digital arena.

Likewise, deeper and increased numbers of partnerships with OEMs may be possible as carmakers will likely remain in financially challenging positions. OEMs are under pressure from both established competitors and nimble EV and autonomous vehicle (AV) startups, which are in many cases spectacularly outshining their larger rivals. Even before the pandemic hit, ever-closer industry partnerships and collaborations were a growing trend.

Due to increased numbers of employees working from remote locations, businesses may choose to embrace zero-based budgeting methods and reconstruct income statements from scratch with an aim toward providing dynamic resource allocation. Under such arrangements, leaders of each line of business should define “survival minimums” in terms of services performed and budgets required, instead of basing numbers on prior years’ expenditures. This would have the benefit of consolidating production facilities, eliminating activities that don’t add value, and reducing investments in noncritical new assets. The airline industry is currently utilizing this approach with demonstrable success.

Even though vaccines for the virus have been introduced, it’s possible that new waves and strains of COVID-19 could again disrupt supply chains, particularly any that rely on overseas connections. Therefore, supply chain resilience, transparency, and local and/or backup sourcing will become critical for both suppliers and OEMs.