All Automotive

The impact of the coronavirus pandemic on the automobile industry

The coronavirus, or COVID-19 specifically, has had an effect on the global economy not seen since perhaps the Wall Street Crash of 1929 with an expected $1.5 trillion hit to GDP over the next six months. However, where there is a crisis, there is also opportunity. It may be the case that the coronavirus pandemic of 2020 provides a catalyst for change that the automotive industry has sorely needed for some time. Before we examine how those innovations may take shape, it’s useful to take stock of the current lay of the land. 

Broadly speaking, the impact the coronavirus is having on the automotive industry can be broken down into two distinct elements that require separate evaluation. The first is the effect the virus outbreak is having on revenues. The second component relates to supply chain problems such as scarcity and delays. 

As with almost all industries, revenues are set to dry up in the wake of global dealership closures in adherence with orders of both national and local governments. The fast-moving nature of this scenario makes it difficult to project with any certainty, however, since large portions of China have been subjected to lockdown measures of differing severity for the entirety of Q1, it’s useful to use this country as a barometer. 

In February alone, new car sales fell by 80% as dealerships closed en masse nationwide – a new record plunge for monthly car sales. While that percentage drop may be a cause for alarm, there are reasons to be more positive about sales within Western developed economies. Firstly, the dealerships were forcibly closed much earlier in the virus response in China than they were in Western counterparts such as the United Kingdom and the United States. Secondly, the aforementioned dealerships in G7 economies will remain partially-open in the form of operational car service departments, telephone sales teams, and online customer support. At time of writing, vehicle deliveries are still being honoured as normal; albeit with more stringent hygiene policies. 

Next, the onset of the COVID-19 epidemic has forced auto brands to ramp up the development of roadmapped innovation regarding how cars are purchased. Car manufacturers are moving as quickly as possible to deliver an “online showroom experience.” The successful trial of Hyundai’s online “Click to Buy” dealership model in the UK has had other carmakers scrambling to catch up in a world where individuals are repeatedly advised to avoid face-to-face contact. 

Engine choice, transmission options, colour selections, and even personalised finance offers powered by machine learning are set to become the new normal for would-be car buyers online. If this innovation continues to rapidly proliferate across brands, it will be interesting to see what it means for the conventional dealership. It may present the opportunity to streamline the buying process and shed the overheads associated with the physical retail environment in the current climate.

Automakers have also been incentivised to produce medical supplies by national governments which could help in the fight to beat the continued spread of the virus. Whilst revenues from these efforts would not nearly cover those reaped from new car sales, they will help to soften the blow. The undisclosed figures on offer from governments have been kept a closely-guarded secret. However, they’ve been enough to tempt Ford, GM, and Tesla to switch over production in their idling factories; despite the fact that many industry analysts are sceptical that the desired ventilator outputs can be achieved at such short notice.

There’s a slightly less rosy picture when it comes to auto shows, frequently seen by automotive marketing departments as a chance to drive interest and secure orders on as of yet unreleased vehicles. One such show is the New York Motor Show, which has been postponed until late August, as has the similarly significant Beijing Auto Show, which was slated for the 21st of April. Auto shows commonly kick off large scale marketing campaigns for vehicles yet to be released. With a ubiquitous ban on conferences and events, the delay will likely have a knock-on effect on projected revenues normally achieved as a result of these campaigns. Only time will tell if those rearranged events go ahead, with the resulting revenue posted accordingly. 

The problems seem starker on the supply side of the equation. This outbreak has affected the automotive industry particularly severely because Wuhan has been critical to so many leading brands. Known locally as “Motor City”, Wuhan is home to manufacturing plants for GM, Nissan, Peugeot Group, Jeep, Renault and many others. For Honda, Wuhan accounts for 50% of their total Chinese production. Furthermore, in Europe, the new epicentre of the outbreak, there have been factory shutdowns in almost every major country costing the industry an estimated £29 billion. 

Parts shortages are chiefly to blame for the recent issues experienced in manufacturing, which has been compounded by falling demand. Many European brands have been left with no option but to cease production as a result of Romanian suppliers shutting down production of over 400 different car components, leaving an estimated 230,000 factory workers temporarily unemployed. Tesla has fallen foul of “Shelter in Place” orders (whereby all non-essential business are forcibly closed) in California, and all Japanese automakers have suffered as the result of the nationwide lockdown in India.

On a more positive note, as of the 8th of April, many Chinese factories are slowly but surely returning to a modicum of normality. But the impending “inventory whiplash” – the effect of fluctuating from zero demand to a wave of insatiable supply requests (which increase in pressure the further back up the supply chain you go) – happening across the country will highlight an issue that many within the industry perhaps recognised, but chose to ignore when the going was good. Over-exposure to China is the chief reason behind the insurmountable supply chain issues that many leading brands are currently facing. As a result, the events of the first six months of 2020 will permanently change the shape and structure of global supply chains. 

Many view the move as not a moment too soon. With countries such as Thailand, Vietnam, and India all producing over a million cars a year, brands will have to look to spread their eggs amongst many baskets to protect themselves from future supply-side crises. Why leading automakers didn’t see the issue with focusing so much production within just one country is another question. We expect changes to be rolled out within months to hedge against further region-specific bottlenecks in the future. 

In conclusion, the next couple of months will bear witness to many auto manufacturers treading water as Chinese production is ramped back up amidst a backdrop of dormant European and North American factories. However, the lessons learned from this episode will be permanent and beneficial for the industry as a whole. In many ways, smarter companies will use the outbreak of COVID-19 as a much-needed wake-up call. They will look to develop and improve online experiences for the average car buyer. Concurrently, on the supply-side of the business, action will be taken to eliminate the over-dependence on China, which has made this crisis particularly painful.

Here at Haig Barrett Partners, we will continue to monitor the situation and bring you further updates as and when the dust finally settles on what has been a perilous few months for the automobile industry with many lessons hopefully learned.