In the second of a series of conversations, just-auto editor Dave Leggett and GlobalData lead automotive analyst Calum MacRae discuss some of the big questions prompted by the coronavirus crisis and its potentially lasting impact on the automotive sector. In this second instalment, they consider impacts on the supply-side of the business.
Calum MacRae: Picking up where we left off last week…there's some interesting talk going as to what this crisis does for globalisation. The crisis has brought to the fore the fragility of global supply chains once again. It seems to me there are a number of possibilities as to where OEMs go with supply from here as low-cost doesn't necessarily equate to best cost. That could mean more onshoring of supply – bringing more automation to factories to match costs (given more impetus by social distancing measures in manufacturing). Or a move away from strict JIT with its lean inventory and warehouses for more buffer stocks. Alternatively some may choose to keep things just as they are after carrying out a deep audit of their supply chain.
Dave Leggett: Companies will certainly be re-evaluating their supply bases and looking to understand where weaknesses and risk lay. The initial crisis in China quickly created problems for automotive supply chains in Europe and Korea. Do you recall when oil went over $100 a barrel? There was much talk of the higher cost of long-distance freight leading to changed sourcing policy – going more local. But it didn't really happen. The auto industry is fiercely competitive and low-cost global sourcing is ingrained, especially for some types of components. It's a drug the industry may want to be weaned off now though, at least at the margin. Another way to address risk is to multi-source some components, but the case for that can be clouded by higher cost also. All in all, it will take companies some time to assess the best way forward and learn lessons.
CM: Multi-sourcing is interesting. I think there's been a bit of a shift to that anyway with the advent of multi-million unit global platforms. Not all suppliers have the means or appetite to scale to the degree required so there have been increased cases of multi sourcing as a by product of high volume platforms. You're right in that we've been here before with the talk of the re-evaluation of global supply chains. It happens at every inflection point be it oil, earthquakes or tsunamis. What might be different this time round is that the ensuing financial crisis will force some consolidation. That might alleviate for a while some of the competitive pressures in the industry that necessitate lowest cost sourcing. But those pressures won't subside for long.
DL: Yes, I think we'll be hearing a lot about right sourcing and best cost, but it will be interesting to see how much really changes this time. I agree we will see quite a bit of consolidation though. There are some big financial pressures and something, as they say, has got to give. The bigger companies are probably helped by their cash reserves, as well as easier access to credit. But cash burn for some is at an eye watering level, so even some big companies will be under a lot of financial stress. I wonder if we'll see consolidation even at the OEM level, with some companies looking to offload brands, discrete business units or factories. Another interesting question is: who might be particularly active in looking for acquisitions? Could be kind of ironic if Chinese companies end up in a particularly strong position. They may view it as a huge opportunity to get competitive leverage in market presence or advanced technologies.
CM: I think in Chinese the word crisis can translate as danger-opportunity. There's a delicious irony there. State-sponsored Chinese companies, with an even lower cost of capital than is available in the West right now, are probably best positioned to benefit. There'll be a lot of well-known companies in distress at the moment who'd be very attractive additions to Chinese companies right now. Even more so now while they're under close inspection due to the aims of the Made in China 2025 industrial policy. Before this crisis I would have said we're at that inflection point in the Chinese market where the long-signalled consolidation of the industry would be getting underway. Now I'm not so sure as there are plenty of external opportunities that will further forestall that day of reckoning.
DL: This crisis will probably end up causing many assumptions about the direction of the auto industry to be turned on their head, or at least re-examined. CASE, for example, still seems to make a lot of sense for the very long-run, but I wonder whether elements of it will now move at a slower pace than predicted before Covid came along. We're seeing companies start to put the brakes on some things like – last week with Ford, for example, on AVs. I note that Daimler and others are stressing that they will not let-up on investments that are vital for long-term competitiveness, but it must be tempting to trim some investments – or work with others in JVs maybe. It is certainly interesting to think about the CASE elements and which ones will have higher or lower priority over the changed environment of the next few years. I think electrification is coming down the tracks, but OEMs may be relieved to be off the AV hook for a while and very glad to put car sharing on the back-burner.
Some may even feel that the traditional automotive business model (manufacturer-dealer-customer/owner) has potentially been given a new lease of life.
CM: I agree on electrification. That train's already left the station. But there were enough question-marks about the natural size of that market in the short- and medium-term in any case. Now disposable incomes will potentially take a hammering and there'll be some trepidation and uncertainty introduced into consumers' minds. Will they want to jump into the unknown? Probably less likely to than they were pre-COVID. This might play into Tesla's hands – they're synonymous with electric cars – and might represent safe harbour for those consumers still wanting to dip their toe into the EV market. Tesla's your Apple iPod if you like, everyone else is your generic MP3 player. Now the generic MP3 market might subsume the iPod in the long-term but where we are on the adoption S-curve still gives the advantage to Tesla.
Autonomous is interesting. It's not crucial for the industry at the moment. I'm sure it's been pushed to the back of the queue for R&D dollars. Its development was hinged on being a development of where ADAS was going and confluence with the sharing economy. I'm not sure in the grand scheme of things that one exists without the other. Sure there'll be autonomous delivery needs, but I'm deeply sceptical about the market for Level 4 and Level 5 autonomous vehicles before 2030 at least. AVs might just turn into this generation's fuel cell EV – it's coming but in 10 years time which we'd repeat every January ad infinitum.
DL: There is also probably an unintended consequence of some sort out there. R&D budgets will be under pressure, but in the coming forensic examination of investment spending, something may emerge as an unlikely winner. A public health emergency could, for example, give a big shot in the arm to AI and robotics in manufacturing. Humans with their social distancing protocols in restarted factories have perhaps just become a little less cost-efficient versus robots.
CM: More AI and robotics were coming over the horizon for manufacturing. This shock will accelerate adoption particularly if more onshoring is an option chosen by the industry to mitigate risk in its supply chains. The current situation is going to be a tremendous test of how agile in manufacturing many of the OEMs are. Some have already said that they'll only be manufacturing to order once they start up – there's enough inventory sitting around at current demand levels – so it'll be a good test of who's got the most joined up order-to-manufacture process. It's a kind of trial run for how well Industry 4.0 has been implemented and hopefully it doesn't show 4.0 to just be another set of new clothes for the Emperor.
DL: Certainly, Industry 4.0 is going to be something to keep an eye on. Some of the industrial trends ahead will work in combination, too. Manufacturing and process, for example, will be subject to Industry 4.0 – but there will also be that element of taking complexity out wherever possible – make the final product offering easier to understand – for dealers and customers, probably also to facilitate many more online sales. And rationalise all the back-office and manufacturing processes to take cost out where possible. The way we buy cars hasn't changed much and there are, arguably, very good reasons for that. A car is not an item simply ordered off Amazon. But there are some very creative ideas emerging on how to improve the retail end of the business and make it more efficient. All parts of the value chain – from raw materials into the factory right through to the customer handover of the final product are going to see accelerated change over the next ten years. We knew that before the corona came, but it will speed some things up.
(To be continued)