Assessing the Situation in the Automotive and Supply Industries
Paused production, falling demand, supply-chain instability, and structural change
In Germany and across Europe, factories in the automotive and automotive supplier industry fell silent at the end of March. Since then, production lines have started again at partial capacity. Car manufacturers in Germany alone are losing hundreds of millions of euros every day due to production downtime. 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.
All of this affects the automotive supply industry to the same extent as OEMs. However, the picture is not entirely heterogeneous. On the one hand, the situation is very difficult for established parts suppliers that missed out on the e-mobility trend, but that was already the case before the COVID-19 crisis which has only made matters worse. On the other hand, there are newcomers (including individual divisions of established companies) in the component supply chain that have worked intensively with future technologies. These companies are now gaining enormous momentum and have the financial means as well as the human resources to continue following this trend. Most activities, be they large-scale projects or research and development, have not been affected by lockdown measures (also thanks to support from the OEMs concerned). However, it is possible to see a fundamental problem in understanding the requirements of OEMs with regard to security of supply, maturity level assurance, and quality standards.
A very similar picture emerges for plant suppliers. Plant manufacturers that are not highly specialized and are exposed to high competitive pressure or price wars even under normal circumstances face a much greater struggle due to the crisis than those who see themselves as equal partners to OEMs given their status as technological leaders. It is possible that plant manufacturers involved in a broader range of industries and technologies will be able to compensate for losses in the automotive industry through business with other customers (e.g. the high-tech and medical technology sectors).
Furthermore, many technology leaders – both component suppliers and system suppliers – have a significantly higher level of vertical integration than manufacturers of standard products, which makes them less susceptible to any problems in the supply chain.
We can see five specific areas of action for the automotive industry:
- Restart factories, keeping an eye on the cost structure, resource availability, and hygiene measures
- Rethink strategic decisions with respect to product portfolios and technology leadership while rigorously pursuing strategic projects to manage structural change
- Implement cost-reduction initiatives
- For newcomers: introduce standards and guidelines (VDA) in order to meet the requirements of OEMs
- 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 in the automotive industry – though the overall environment is completely different this time. Demand is far lower than normal capacity, the sick-leave rate is very high at 15 to 20 percent, 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 departments with a high concentration of workers, additional worker protection measures must be implemented.
Task force teams are fully occupied with ensuring complete transparency of supply chains, identifying problem suppliers and realizing solutions at short notice. Management structures, support departments, and administrative units must also spring back into life in step with operational teams, but this is not a simple “rule of three” given the step-fixed costs. As a result, capacity in many of these departments is not planned in proportion with the production schedule, creating a negative influence on the cost structures. We estimate that the total costs for the ramp-up phase phase will be 20 to 25 percent higher, relatively speaking.
2. Rethink strategic decisions with respect to product portfolios and technology leadership while rigorously pursuing strategic projects to manage structural change.
Structural change will happen, and it is taking place through a political decision-making process geared toward meeting CO2 targets. These targets may or may not be postponed, but it will only be for the short term if they are. Companies that do not move in line with this change will lose their market opportunities in the medium term.
For suppliers that are heavily dependent on conventional drive systems, we recommend screening the current product portfolio with a technology road map, including different quantity scenarios and megatrends.
Despite the various savings initiatives, all projects involving e-mobility must proceed at full speed. Based on our assessment, these projects must be organized independent of business operations so that the speed of 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.
3. Implement cost-reduction initiatives.
We assume that assembly lines and supply chains in the automotive industry will be stable 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, To this end, adequate programs need to be set up from the top down – costs and structures will need significant adjustment. The instrument used for this downsizing in 2020 will be the reduction of working hours. German automotive groups had already implemented savings initiatives before 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 these conditions, we expect that cost-reduction initiatives will continue into 2021 in a systematic fashion, and issues such as employment guarantees will have to be rediscussed.
4. For newcomers: introduce standards and guidelines (VDA) in order to meet the requirements of OEMs.
In order to develop a deep understanding of the requirements of automotive OEMs, “new” suppliers have to make an early start in that area. This includes an evaluation of their own company culture and a defined production system that allows optimal transparency with regard to volume, quality, and delivery reliability. Simply relying on technology leadership will not work in the long term for effective customer relationships.
5. Realign the supply-chain structure to mitigate future risk.
Supply chains will be protected through operational measures during the ramp-up period. Realignment will be necessary so that supply chains are more robust in the event of similar crisis situations in the future. Existing structures must be ruthlessly stress-tested to identify any weak points and develop suites of measures based on these. Even though the focus on this area of action will reduce once the crisis passes, we recommend keeping them on the company’s radar as a form of “insurance” in the future.