COVID-19 recession bites deep into automotive, but company strategies for recovery now vital

By Dave Leggett | 8 June 2020

Companies now have to lift their sights, develop strategies for the recovery period ahead

Companies now have to lift their sights, develop strategies for the recovery period ahead

With vehicle markets decimated across the world, automotive companies are coming under considerable pressure due to lost sales, but now is the time for them to formulate strategies for recovery over the next eighteen months.

The COVID-19 crisis has brought an unprecedented and sudden loss of sales. Automotive companies face a hit to the market that will be greater than in the 2007/8 financial crisis.

GlobalData's base COVID-19 light vehicle sales scenario forecasts a fall of 17.6% on 2019 to 74 million, with declines heavily weighted to the second quarter when population lockdowns were introduced across the world. For companies, 2020 is mainly about riding out the downturn and conserving cash, but also being ready to capitalise on gradually returning demand and recover, and be well-positioned for whatever 'new normal' we are faced with in 2021 and beyond.

Markets around the world are starting to come back and we expect the rebound to gather pace in the third quarter - although it is still a volatile picture while the public health emergency is far from over. Vehicle manufacturers are able to restart factories under new safety protocols, another positive sign. However, there are multiple challenges ahead for companies as they eye a rolling recovery period ahead.

Aside from the immediate additional costs associated with new safety protocols and employee risk assessment, they have to carefully calibrate manufacturing operations to lower than normal levels of market demand - which means controlling output levels to effectively manage cost and capacity utilisation at economically sustainable levels. It will mean cutting shifts and managing low batches of production, with a very different inputs-to-outputs process set-up compared to pre-crisis norms.

Manufacturing output also has to be coordinated with distribution arms and retailers to avoid inventory build-up and ensure that effective demand is quickly fulfilled.Companies must also re-assess manufacturing supply chains for low-cost and robustness, in order to mitigate risk. The COVID-19 crisis has shown how fragile elongated global supply chains can be.

As governments introduce stimulus programmes for the sector and purchase subsidies for some vehicle types, there is also a need to ensure that the right model mix - for example, battery electric vehicles - is available in a timely fashion. Most importantly, they have to ensure their balance sheets are in good shape and that they can ride out the recession with adequate cash reserves. If low-cost finance or government loan guarantees are available, they should capitalise on all available opportunities.

There is also a critical balance to be struck on cost-cutting. Some cost cuts may be necessary temporarily and it may also transpire in the coming months that some fixed costs, investment programmes or projects should be permanently reduced or axed. What was justifiable before COVID-19 may not be afterwards.

It is often a tough judgement call, but the danger in cost cutting is in going too far and impeding a company's competitive position further down the line. High levels of investment in advanced technologies, such as electric vehicles and hybrids, are still needed for the medium- and long-term. Indeed, they could turn out to be more vital than ever. Failing to invest sufficiently in new product has come back to haunt companies before.

There are a host of factors to take into account as this unprecedented crisis gradually eases. The automotive industry, with its high fixed costs and big-ticket products, is more exposed than most. We believe companies should evaluate their mid-term strategies to address the pathway to sector recovery over the next eighteen months or so as soon as they can.