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Article - 01 July 2020

The Automotive Industry and COVID-19: challenges and opportunities.

The automotive industry was going through the period of its greatest transformation in its more than one hundred years of history when we were unexpectedly hit by the COVID-19 pandemic.

In an attempt to halt and control the spread of the virus, more than half of the world’s population has been subjected to containment measures. Global supply chains have been shaken and disrupted, and the economy has plummeted – according to IMF estimates, world GDP will shrink 3.2% in 2020, with an impressive 7.3% drop expected in Western Europe.

Facing an enormous disturbance never experienced and whose consequences are not yet well known, there is only one certainty: the future is uncertain!

At such times, it is easy to let pessimism take over. Fear, while natural, cannot paralyze us or cloud our judgment. We must adapt and have the courage to continue. Managing uncertainty requires energy, flexibility, and creativity. We must have a cool head to analyse the present and vision to navigate the opportunities that lie in every crisis.

Due to massive lockdowns, it is not surprising that the mobility sector is one of the most affected by this crisis. But the black clouds that hang over this sector are not limited to the drastic reduction in vehicle miles travelled (VMT).

To uncover the best opportunities, the first step is to know the problems. Next, I will take you through three factors that, in my opinion, contributed hugely to the crisis affecting the automotive industry. Hopefully, I will be able to point out some opportunities as well.

Disruption of global supply chains.

A single car has an average of about 30,000 parts. Putting all these parts together requires the most complex supply chain logistics the world has ever seen.

Even before the disease was felt in Europe, the impact of the disruption in global supply chains was already visible, with many European factories halting production due to the lack of parts produced in China.

In a relentless quest for cost optimization, the world made a foolish mistake by putting all the eggs in one basket – the automotive industry was (is) highly dependent on Chinese production. When Wuhan, the first city hit by the virus and an important centre of automotive production, underwent a lockdown, the effects rapidly spread throughout the world.

Multiple economic factors over the past several years have eroded the cost benefits from offshoring, and total costs rise dramatically during disruptions. With the virus of populism also spreading globally, giving rise to protectionist measures in several regions, is this the end of globalization?

I think not. But it is time to correct some past mistakes and adapt to a new reality. The new order is glocalization.

Manufacturers and suppliers are likely to rethink their supply chain models, from sourcing of raw materials to the production of finished products, seeking the implementation of alternative supply sources.

Countries such as Brazil, Chile, India, and Mexico have historically been the main alternatives to China as tier 3 (raw material) supply markets.

Photo by Bart van Dijk on Unsplash

Tier 1 and 2 suppliers, in turn, are likely to move closer to the end markets, creating important opportunities for the reindustrialization of Europe and North America.

This will come at a cost, producing a car will become more expensive. In a moment that consumers have less disposable income, this will put extra pressure on the manufacturers to reduce prices. Manufacturers are likely to reduce their portfolios by betting on their most profitable models and offering fewer customisation options. More than ever, customer experience will make a difference.

We will also see an acceleration in the consolidation trend in the sector, creating a series of M&A opportunities for players who can get out of this crisis in a stronger position.

Uncertainty and economic depression.

Although we are currently observing a relative increase in the use of the private car (which I will elaborate on in the next section), that does not mean that users will rush back to buy new cars. In a world dominated by uncertainty and with the unemployment levels at record numbers, drivers will delay purchasing decisions.

A recent study from McKinsey shows that during the previous crisis when the US GDP dropped by 4%, the sales of new vehicles dropped by 42%. Although not as bad, the drop in the sales of used cars then was still an impressive 20%. This time can be different.

Car rentals largely depend on airports for profits in the US and across Europe, which account for two-thirds of their business. However, since airline travel has decreased by 96% due to COVID-19 rental groups have seen revenues evaporate. Hertz, the global rental company with revenues of 9.8 billion dollars in 2019, just filed the bankruptcy of their US and Canada subsidiaries, something unthinkable just a few months ago.

This will flood the market with used cars putting pressure on prices and margins. The drop in the volume of used car sales may not be as sharp as in 2007-2009, but the tight margins will not be of great comfort. New car sales are likely to suffer even more.

Photo by Milan Degraeve on Unsplash

The aftermarket is generally the most resilient part of the automotive industry to a recession, as it depends primarily on the size of the car parc, not on sales of new vehicles. When consumers delay buying new cars, repairs to their current and older vehicles become even more important. Still referring to the 2007-2009 financial crisis, the decline in the aftermarket in the US was only 1%. Even more impressive if we consider the drop of VMT of 2.4%. Reasons for some optimist among manufacturers and repairers since this is also their most profitable segment of the business.

However, authorized, and independent repairers will go through a testing period in which only the strongest and most prepared may survive. Due to travel bans, we have witnessed drastic reductions in the number of VMT. As high as 40% in Germany, 60% in San Francisco and 80% in some parts of China, resulting in a considerable reduction in the number of collisions. While positive for society, is not as good for the automotive repair business.

Fierce competition and economic pressures may force smaller operators to exit the market, leading to consolidation opportunities in the aftermarket domain too. Players who have already been preparing and those who can adapt quickly, adopting digital business models, can emerge as winners. If consumers cannot come to the dealerships, the dealerships must come to the customers and provide them with a life-like enjoyable experience.

Changes in consumer behaviour.

Without a known vaccine or treatment for COVID-19, the private car is returning to the centre of the stage. According to Ipsos, a global market research consulting, the use of public transport (bus and metro) went down from 56% of all trips before the outbreak to 24% after, and car-hailing platforms decreased from 21% to 12%. In the opposite direction, the utilization of private car rose from 34% to 66%. Oil’s current low price may exacerbate this trend.

During the outbreak, employers all around the world promoted telework to respect social distancing.

It remains to be seen what permanent these changes will be. I think more the second than the first. French carmaker Group PSA announced its ambition to continue promoting telework among its employees after the lockdown lifts. According to PSA, around 80,000 employees out of 200,000 worldwide could be affected.

Although consumer buying habits have changed dramatically in recent years, thanks to the progress of e-commerce, the automotive sector was not at the forefront of these changes. Lockdowns and the fear of contamination popped this trend and opened more conservative mindsets, both for customers and retailers.

Manufacturers will focus more on digital, for example, developing direct sales platforms to final customers. Dealerships too must adopt a digital strategy, becoming omnichannel.

Another trend that will see some growth is DIY (Do it Yourself). Although increasingly complex products do not allow all of us to repair our cars at home, we are still going to watch a significant increase in demand for parts e-commerce.

Photo by Matheus Ferrero on Unsplash

Finally, society seems to be taking advantage of the forced pause to make a conscience examination, revaluating the way we interact with each other and with the natural ecosystem. New priorities are taking shape. “Purpose” is replacing profit as humanity’s main driver. This will shape people’s consumption habits. Europe’s green deal will come out stronger from this crisis, with governments pouring billions of Euros in a green rescue plan for the current ailing economy. Electric vehicles (EV) will benefit, so will EV charging infrastructures. With so much still to be done in this matter, opportunities will not be lacking.


The automotive industry has gone through many crises in the past and has always known how to turn things around.

Taken by surprise amid the ACES revolution (autonomous, connected, electric and shared vehicles), the perfect storm has formed with the arrival of this pandemic. But the greater the challenge, the greater the incentive to evolve – the most responsive to change will know how to navigate opportunities.

Glocalization of supply chains, digitisation and electrification will be factors of success.

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