Our automotive team held a panel session to share insights about the latest activities in the market. Oliver Bridge presents some of the discussion points.
There are similarities across the globe in the way the automotive manufacturing industry has reacted to the crisis. During the most restrictive lockdown periods, short-term demand for vehicles fell to around 90% of typical monthly sales. This is causing automotive firms to reduce costs at an unprecedented level as they reduce production capacity.
Many manufacturers do not have suitable visibility of their supply chain, resulting in a slow start up because some inventory and sub-assemblies are not available. In particular, globally sourced parts are difficult to co-ordinate with disruption in the supply chain. Many OEMs are operating at capacity levels significantly below optimal due to available parts.
There are also local differences in the way the automotive manufacturing has reacted to the crisis. This will impact how quickly the different countries emerge from the reduction in demand, their cost base and competitiveness in a global industry.
Automotive debt structure around the world
The structure of debt may determine demand in the future. For the UK, where leasing schemes provide funding for around 85% of car purchases, it is expected that lease renewals will drive demand in the short term. However, in India, leasing is currently a very small part of the automotive market and so demand may be delayed until consumers are more confident in the economy.
In the US, there is already significant consumer debt and purchasing of new vehicles will be driven by favorable financing deals, such as long-term cheap debt. However, limited availability of public transport in parts of the US and India, and the willingness to isolate may drive increases in passenger car usage.
In the US and the UK, there is rising unemployment that may provide an ample supply of labour to car manufacturers. However, in India, many workers have returned to their home state, reducing the availability of local, skilled workers to the automotive market. This has the potential to increase costs as overtime increases.
Social distances vary globally
Social distancing guidelines are different between countries; with the UK (6’6” or 2m) being the widest distance, followed by the US and India (6’ or just under 2m), then Germany (1.5m) and countries such as Sweden (1.0m). The consequence of this, particularly in the UK, is reduced efficiencies as manufacturing and selling cars becomes more difficult and investment is needed in expanding canteens, offices, parking, dealerships and other communal areas.
The UK is implementing their Brexit plan, which is widely regarded as negative to the automotive industry and provides great uncertainty. This has the potential to increase costs and transport time. The US has recently been impacted by new tariffs resulting in the on-shoring of jobs. Conversely, India has a more stable foreign policy for automotive and has been attracting investment and is potentially bringing in policies, including a scrappage policy to support demand.
India and China has seen some M&A in the automotive market as firms look to invest both domestically and globally. In the US and UK, there has been limited M&A activity, which is expected to follow later in the year.
We are seeing businesses reacting to these challenges through robust business planning, detailed financial modelling, engaging with local experts in automotive M&A, assessing supply chain resilience and reviewing costs across the whole supply chains.
To continue the conversation about the challenges facing the automotive industry, get in touch with Oliver Bridge.
Thanks to our panel of automotive and industrial specialists: