Hit Hard by COVID-19, the Automotive Industry Is Fighting Back

COVID-19, which began in Wuhan, China, has shut down factories around the world, hitting the global automotive industry especially hard. Wuhan is known as a “motor city” for being home to manufacturing operations for General Motors, Honda, Nissan, and other major automotive companies; in fact, the region accounts for about 50% of total automotive production in China. The negative impacts of the pandemic were swift and severe: for example, China was the first country to experience a decline in its automotive market, with light vehicle sales falling by 18.6% year-on-year. Then, in the first half of February, car sales in China fell 92%.

As the pandemic swept the globe, other automotive markets suffered serious losses and cutbacks. With China being a major supplier of automotive parts, supply chains were suddenly disrupted, leading to production slowdowns in Europe and the North America. It is not just supply chain woes that have slowed or halted production—a huge drop in consumer demand is due to millions of potential buyers who are unemployed, have limited financial resources, or cannot go to car lots and showrooms because of stay-at-home orders or other restrictions.

 

“The auto industry has seen the impact of the coronavirus crisis evolve from a supply chain shock to a global demand shock,” notes Brian Collie, managing director and global leader for the automotive and mobility practice of Boston Consulting Group.

 

Other numbers that show COVID’s economic toll on the global automotive industry include:

 

  • March: The EU’s light vehicle market contracted by 44% year-over-year
  • April: New passenger vehicle sales in the U.S. fell 46%
  • April: Production in Mexico and Brazil, Latin America’s top auto manufacturers, fell by 99% year-over-year
  • April: Thailand year-over-year production declined by 84%
  • May: In Mexico, automobile production was 93.7% lower than it was for the same period last year
  • June: U.S. vehicle sales in the second quarter for General Motors, Toyota Motors, and Fiat Chrysler fell by more than 30%
"The auto industry has seen the impact of the coronavirus crisis evolve from a supply chain shock to a global demand shock."
Brian Collie, Managing Director and Global Leader, Automotive & Mobility Practice

Boston Consulting Group

Supply Chain Challenges

 

Perhaps the most frustrating COVID-19 challenge was the disruption of the supply chain. Many global automakers source up to two-thirds or even more of their parts from China, including modules and sub-assemblies. The closure of these production centers created massive slowdowns in automotive production around the world.

 

Having offshored their manufacturing activities to low-cost countries, notes Vinay Piparsania, consulting director for Automotive with Counterpoint Technology Market Research, many automotive OEMs and suppliers are now scrambling to establish shorter or localized regional supply chains.

 

“However, given the incredibly high number of parts required—each with different lead times—a return to regional supply chains does present an incredibly complex challenge,” he states. “COVID-19 has exposed the weaknesses of a globalized manufacturing system, necessitating a fundamental rethink of existing supply chain operations. Supply chain models will need to be reconfigured, based on business optimization.”

 

Moving Forward

 

Long-term forecasts project losses for the automotive industry for the duration of 2020. For example, global vehicle sales could fall year-over-year by more than 20% in 2020 and not return to pre-COVID-19 levels until 2023. Boston Consulting Group predicts that automotive sales will likely decrease 14-22% among the China, U.S., and European markets in 2020.

 

That said, there are signs a recovery is underway.

 

Supply chains have stabilized, with shipments of parts and raw materials resuming from China, Mexico, and other countries. In May, auto sales in China rose 14.5% year-over-year, the second straight month of growth. The China Association of Automobile Manufacturers expects its auto market is expected to fully recover by 2023. Production has also resumed in Mexico, with Honda, Toyota, and Nissan restarting their operations in mid-May.

 

As we move forward, key questions that auto execs must ask themselves, according to Deloitte, are:

 

  • How can innovation enable business optimization in a disrupted industry?
  • Are there strategic partnerships or acquisition opportunities that will enhance competitive positioning and business resiliency?
  • What strategic investments can be made for long-term gain such as IT infrastructure, upgrades, and digital supply network transformation?
  • To what degree is social distancing changing consumer behavior, and how can digital tools be used to maintain customer engagement?

 

There are certainly plenty of questions to choose from as the automotive industry moves forward into, hopefully, a post-COVID world, which will invariably include many more unseen challenges. What is clear, however, is that “it is critical that companies take a comprehensive approach and develop a range of scenarios and robust contingency plans to navigate through these turbulent times, and what is to come,” said Collie.

"It is critical that companies take a comprehensive approach and develop a range of scenarios and robust contingency plans to navigate through these turbulent times, and what is to come."
Brian Collie, Managing Director and Global Leader, Automotive & Mobility Practice

Boston Consulting Group

    Some opinions expressed in this article may be those of a contributing author and not necessarily Gray.

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