The Road Ahead for the Automotive Industry
By Amelia Frank
COVID-19 has forever changed the way consumers and suppliers interact and think. The pandemic has increased unemployment, caused supply chain disruptions, accelerated automation, and changed consumer behavior. Virtually every industry has faced repercussions of the virus, but the automotive industry in particular has faced countless problems. The automotive industry employs 59 million people worldwide, and contributes an estimated $5.5 trillion to the global economy. The industry has been forced to lay off thousands of workers due to the pandemic. Additionally, the supply chains that the OEM’s (original equipment manufacturers) have relied on have been broken. A shortage of Chinese and European made parts have had a consequential effect on global production. So the question remains; how can the automotive industry survive this period of economic decline and end up thriving post-pandemic?
Empirically, the industry has thrived during similar crises. In the midst of the 2008–2009 recession, 64 million new light vehicles were sold globally. This includes cars, motorcycles and lightweight trucks In 2019, nearly 90 million vehicles were sold, with China emerging as the largest automotive market in the world, despite a slowdown in the region from 2017 to 2019. The industry even thrived during the SARS virus; “Based on experiences from SARS, however, automakers actually recovered the fastest from the short-term interruption and reported record-high sales numbers after the emergency period. The logic behind this is simple — when people find commuting with public transportation is not safe enough, their demand for automobiles will be ‘released’.”
The industry is rapidly adapting to COVID-19 in order to better serve customers and profit in a time of uncertainty. Prior to the pandemic, many car companies were hesitant to offer flexible purchasing processes. Most dealerships profited from in-person service and preferred establishing long term customer relationships. For these reasons, many companies chose not to move towards digitized sales and customer interaction, even though the technology was available and, in some cases, preferred. Now, online sales are booming. “A new study by Frost & Sullivan estimates that almost 825,000 new vehicles were sold online globally in 2019, either through online financing or by making a part payment online. By 2025, it is estimated that 6 million vehicles will be sold through online platforms.”Many smaller companies face the issue of lobbying groups and pre-existing laws dictating that franchises are restricted from selling online and delivering.
In terms of selling and producing cars, this virus is simply breaking the surface of what is considered the norm. Competition is and will always be a push for innovation. As of now Mercedes Benz, Jaguar Land Rover, Daimler, Peugeot, Citroen, Hyundai, Ford and many other companies have launched sales programs on their official websites, selling cars directly or through their dealerships. Even if the virus is only temporary, the billions of dollars these companies are spending to build up entirely new online platforms and nationwide supply chains will create long-lasting competitive innovation. However, the industry still has a long way to go in personalizing the automotive online retail model and incorporating more responsive communication. Even if more companies do more selling online, showrooms and physical dealerships will not be shut down. Rather, their central purpose will change. Consumers will still want to test drive cars and in the case where this changes, these spaces would offer a place to pick up purchased cars.
In addition to moving online, the pandemic has caused many car manufacturers to rethink their reliance on global supply chains. Companies that were heavily reliant on factory production in China have been hit the hardest. The global automotive industry imports more than $34 billion in motor parts from China annually. Alongside manufacturing parts, China represents one of the largest markets for automotive sales, and in February sales dropped 80%.
The impact of the virus is two fold: a halt in production for any company reliant on Chinese production and, for many manufactures, a re-analysis of revenue and cost cutting. A quote by Sarah Rathke, a lawyer specializing in supply chain disputes, explains; “Already tight margins, sole reliance on OEM production, and a precipitous corona-related market drop expose suppliers to significant risk for which they should be proactive. Indeed, the domino effect of plant closures and supply shortages across the extended supply network can quickly lead to significant supply chain disruption.” Companies are now forced to make decisions solely based on available products and materials, which is a position no one wants to be in. Given how detrimental these supply chain disruptions have been, it is in every manufacturer’s best interest to invest in more locally sourced parts. Virtually every American assembly plant that is dependent on auto parts produced in China has to find an alternative to such heavy reliance on global supply chains. Nissan, Daimler, Toyota, BMW, Honda, Renault, Volkswagen and many other automakers have suspended production in Europe and permanently closed plants and factories there.
This pandemic has hit every part of the automotive industry. But this disruption can also be thought of as an opportunity to improve such a fragile system. In a post pandemic world, car companies are selling more and more cars online and profiting off of efficiency and customer satisfaction. Manufacturers are purchasing more locally sourced auto parts and helping small businesses. While in the short term companies face challenges, this period of uncertainty brings change and innovation in the long term.
