Assessing the Situation in the Automotive and Supply Industries
Paused production, falling demand, supply-chain instability, and structural change
In Germany and Europe, the automotive industry’s manufacturing plants have been at a standstill since late March, putting a stop to the supply industry, too. Carmakers in Germany alone are losing hundreds of millions of euros every day due to the production pause. Not only is the coronavirus pandemic confronting them with unprecedented production stoppages, they also have to deal with dramatic falls in demand. New car registrations in Germany collapsed by 38 percent in March, the greatest single-month decline since German reunification. There is no improvement in sight; on the contrary, we expect that the fall will gain even greater momentum over coming weeks. According to calculations the market in Europe is shrinking by 21 percent to 12.5 million vehicles. The basis for these calculations is a cautiously optimistic scenario where the core period of the COVID-19 crisis in each region is limited to six to eight weeks. They also assume government financial support, with discussions currently revolving around ideas such as a bonus for scrapping old cars, like the one paid in 2009, to soften the blow on sales after the financial crisis. Sources in the industry say that the discussions with the government are also covering other instruments including a reduced rate of VAT and better depreciation regulations.
This will have a cumulative effect on the automotive industry, an industry already in a difficult state of structural change brought on by consumers having a different understanding of transport and expectations for sustainability. A report from the National Platform Future of Mobility, a commission appointed by Germany’s federal government, recognized back in 2019 that over 400,000 jobs were at risk in the period up to 2030 if the competitive situation for electric vehicles in the German industry does not improve in the next few years.
Furthermore, the crisis has also shown bluntly how vulnerable and opaque the supply chains of OEMs are. Certain technologies are sourced almost 100 percent from Asia without any backup solution. We are additionally seeing that end-to-end transparency in the supply chain is not ensured from tiers 2 and 3.
We believe there are four concrete areas of action for the automotive industry:
Restart factories, keeping an eye on the cost structure, resource availability, and hygiene measures
Implement cost-reduction initiatives
Rigorously pursue strategic projects to manage the structural change
Realign the supply-chain structure to mitigate future risk
1. Restart factories, keeping an eye on the cost structure, resource availability, and hygiene measures:
Restarting plants after stopping production is a routine matter for carmakers, though the overall environment is completely different this time. The demand is far lower than normal capacity, the sick-leave rate is very high at 15 to 20 percent, the supply chains are unstable, and hygiene requirements must be met.
Rostering models and line balancing must be adapted to the new conditions in a short space of time and discussed with works councils. In sections with a high density of workers, there are additional worker-protection measures that must be implemented.
Task forces are fully occupied with obtaining complete transparency of supply chains, identifying problem suppliers, and realizing short-term solutions. The management structures and support and administration sections must also come back to life in parallel with the teams that are active operationally, however this is not a simple rule of three given the step-fixed sizes. This results in capacities in many of these sections being planned out of proportion with the production schedule, creating a negative influence on the cost structures. We estimate that the total costs for the ramp-up phase will be at a proportion 20 to 25 percent higher.
2. Implement cost-reduction initiatives:
We assume that assembly lines and supply chains in the automotive industry will be running stably again by August, though with demand at a far lower level than before the crisis. Cost structures will have to be quickly balanced during this period, which will require the establishment of corresponding top-down programs. Costs and structures will have to be significantly adjusted. The instrument used for this downsizing in 2020 will be the reduction of working hours. German automotive corporations had already implemented savings initiatives prior to the COVID-19 crisis. According to a study recently published by the University of St. Gallen, European automotive markets in 2025 will see sales of 14.6 million vehicles, 8 percent below 2019 levels. The study predicts that production levels will only return to those seen in 2019 by 2029. Given this environment, we expect that the cost-reduction initiatives will continue consistently into 2021 and subjects such as employment guarantees will have to be rediscussed. Based on our experience realizing a project at an OEM, efficiency-improvement projects offer significant, lasting savings very quickly despite initial consulting costs (14 percent savings in this specific case).
3. Rigorously pursue strategic projects to manage the structural change:
Projects for electric vehicles must proceed at full force even with all the savings initiatives. Based on our assessment, these projects must be organized independently of business operations so that the speed of these projects is not hampered by cost-reduction initiatives. Saving rigorously on one hand while making corresponding investments for the future on the other: Walking this tightrope will be a key success factor.
4. Realign the supply-chain structure to mitigate future risk:
The supply chains will be protected through operational measures during the ramp-up period. A realignment will be necessary so that supply chains are more stably organized for similar crisis situations in the future. Current structures must be stress-tested to find weak points ruthlessly and develop suites of measures based on them. Even though the focus on this area of action will reduce once the crisis passes, we recommend to keep working on it as a form of “insurance” for the future.