Assessing the situation in the commercial vehicle industry
In addition to the challenge of structural change, companies face production downtime, a slump in demand, and unstable supply chains
In Germany and Europe, manufacturing plants for commercial vehicles are now ramping up once again. Nevertheless, factory production lines have been idle for over six weeks since the end of March, causing the same to happen in the supplier industry. The overall result is a massive decline in production volumes.
When discussion turns to ramping up business, this cannot be compared to the ramp-up following annual shutdown, for example. One of the biggest differences is that supply chains are still very unstable. Delayed deliveries and inadequate quality are just two examples that illustrate the more difficult conditions of this ramp-up.
Additionally, the demand situation has deteriorated in recent months. The truck toll mileage index has dropped significantly under the influence of COVID-19. Experience has shown that there is a correlation between this figure and the industrial production index.
Looking at the trucking industry, a decline of up to 30% can be expected for 2020.
A similar decline will present a challenge to the bus and coach industry. The massive slump in tourism will have a particularly significant impact here.
While the outlook for the construction machinery industry is not quite as dramatic, the influence of the corona pandemic will also be felt here. Growth will plateau at a moderate level.
We believe there are four concrete areas of action for the commercial vehicle industry:
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 commercial vehicle manufacturers, although the overall environment is completely different this time. Demand is far lower than normal capacity, the number of staff off sick is very high at 15 to 20 percent, supply chains are both unstable and lacking transparency, and some suppliers are experiencing problems ramping up.
Compliance with hygiene requirements is also a challenge, especially in departments with a high concentration of employees.
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 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, 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. We expect that the cost-reduction initiatives will continue consistently into 2021 and issues 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.