The coronavirus pandemic has added trouble to the already struggling automotive industry. Pre-crisis, automotive companies were directing significant amounts of investment to support the move toward electrification, digitalization, and autonomous driving, hurting revenue and profitability to a certain point. But the coronavirus has brought a new meaning to the term “drop in sales,” and many OEMs are now struggling with risk management.
The market situation has naturally influenced automotive industry outsourcing as well. In the present situation, should automakers cut costs everywhere or is there a way to continue outsourcing software for vehicles and stay afloat at the same time? Let’s try to get a handle on this dilemma.
Recent pre-crisis research from IBM revealed that half of surveyed automotive executives recognized the need to transform their organizations to facilitate data-based operations. Digital technologies will help auto manufacturers leverage insights from connected cars and improve business processes in more than a few automotive fields.
Even more interestingly, IBM expects the economic crisis will force OEMs to accelerate their digitalization. After all, digital sales, connected vehicles, and autonomous driving have the potential to mitigate some of the pandemic’s risks. Also, experts agree that the automotive industry is better prepared for the downturn compared to the airline industry, for instance, as the 2008 crisis taught OEMs some valuable lessons.
They [OEMs] mostly have a reasonable cash balance, and the Detroit automakers, in particular, have done a lot of restructuring, including buying out a lot of older white-collar employees as they try to shift toward new skill sets to support electrification, automation, and mobility.
Flashback to past automotive industry crises
This is not the first time automakers have experienced a severe blow to their sales and revenue, and they’re expected to recover faster than some companies in other industries. From 2008 to 2010, the Great Recession affected OEMs all over the world and was especially hard on the American automotive industry. As the top US automakers — Ford, General Motors, and Chrysler — were focused on SUV production, the increase in gas prices critically hit their profits.
With a lack of fuel-efficient vehicles from American OEMs, consumers turned their eyes to smaller, cheaper, and more efficient Japanese and European cars.
But that was not the last blow to car manufacturing. In 2011, the tsunami in Japan shattered OEMs’ supply chains and shut down the entire global auto industry for days because of a lack of components produced in Japan. After the tsunami, sales of Toyota and Honda significantly dropped, and US companies, in turn, managed to pick up deals by offering smaller and more efficient cars.
The tsunami lesson prompted automakers to restructure their supply chains and their visibility — instant and online — into Tier 1 and Tier 2 suppliers. It also made them better prepared for the COVID-19 crisis.
Crisis of 2020: The impact of COVID-19 on the automotive industry
The effect of the pandemic should not be underestimated. that 80% of automotive and related companies will see a drop in revenue in 2020, and 78% of automotive companies admit they don’t have enough staff to run a full production line. Production losses because of plant shutdowns throughout the European Union are estimated at 1.23 million vehicles in 2020 according to the European Automobile Manufacturers Association (ACEA) It is very likely that new car and truck sales will have to take the biggest hit since 1945.
Considering these facts, it’s clear that OEMs with more automated processes are better prepared for staff shortages and lockdowns. While it won’t help save sales, it will reduce the impact on production and supply. Automotive engineering outsourcing is probably the least affected link in the supply chain, since Tier 2 software providers can deal with remote work better than other supply chain participants and remain productive even during lockdown. The problem is that OEMs and Tier 1 companies struggle with budget relocation, and software development outsourcing is often labelled a “non-critical” expense item.
It is very likely that new car and truck sales will have to take the biggest hit since 1945.
This is understandable, but automakers should not terminate their partnerships with software providers. After all, technology is critical for further development of the automotive industry as well as for dealing with future crises. You don’t believe this is the last one, do you? It’s clear that COVID-19 will return, and it’s quite probable that social distancing and remote operations (where possible) are our new reality. Does that mean people won’t buy cars? Of course not. It only means the demand will change, and OEMs will have to work on new offerings.
While the situation with COVID-19 is far from stable, the automotive market is slowly but steadily recovering. According to the China Association of Automobile Manufacturers (CAAM), almost all automotive parts suppliers in China have resumed operations. Moody’s Investor Services expects global vehicle sales to drop about 6% to 8% this year. Still, people are understandably cautious about public transport, and that wariness is not likely to pass soon. Therefore, interest in car purchases will be high as soon as people get their bearings and stabilize their budgets.
Key automotive challenges brought about by COVID-19 and ways to overcome them
The top concerns of automakers related to COVID-19 are:
- the financial impact
- a potential global recession
- reduction in productivity due to effects on the workforce
- decrease in consumer confidence and, therefore, demand.
There are no fast ways to mitigate the impact of the virus on the automotive industry, but some actions should be implemented even now when the situation is still unstable.
According to the US Bureau of Labor Statistics, OEMs and automotive suppliers employ around one million people in the United States. A lot of tasks these people perform cannot be fulfilled remotely, so employees’ welfare is one of the top concerns for automotive companies. Therefore, mitigating health risks is a priority. OEMs should be focused on:
- following guidelines from health authorities
- identifying critical operations and employees and creating contingency plans
- ensuring that remote work is adopted where possible.
The next biggest concern is avoiding supply chain disturbances, since many automotive production centers have been affected by the virus. While many OEMs have online visibility into their Tier 1 suppliers, the challenge grows as we go deeper into the supply chain to Tier 2 and Tier 3 vendors.
What can be done here? Many US assembly operations rely on Chinese and Japanese components like wheels, brakes, and steering parts as well as electronics and software. Some of these latter elements can potentially be outsourced locally or on other markets. This is especially true for software: Tier 2 outsourcing companies that supply automotive software are the least affected links in OEMs’ supply chains.
To secure their supply chains, OEMs can:
- establish teams to assess and promptly react to supply chain changes (agility is crucial here)
- plan supply redirections based on sourcing strategies
- predict global effects on production and sales
- explore government guidance and the implications of possible tax and tariff changes
- implement software solutions for better supply chain visibility.
In addition to the targeted elimination of risks, OEMs have to change their strategies and roadmaps. For this, agile and dynamic planning is critical, and leveraging analytics is a key component of fast decision-making. As you are working on building resilience, keep in mind it is not about creating redundancy, but rather integrating flexibility and agility into your operations.
As you are working on building resilience, keep in mind it is not about creating redundancy, but rather integrating flexibility and agility into your operations.
How digital transformation can help OEMs survive the crisis
Agility and intelligent analytics-based operations can help to save costs where possible and mitigate the risk of disruptions. Gartner says automakers should also work on their online sales models to alleviate the drop in sales. The next thing to consider is supporting as many remote operations as possible. This will be a high-priority task for some time.
While OEMs are postponing their plans for autonomous and connected driving, other digital tasks are coming to the fore. We can assume that automotive outsourcing trends in the next few months will include remote operations solutions, digital supply chain visibility, automation of some processes, and maybe some IoT healthcare solutions for employees. This means that current partnerships with software providers can be reorganized to solve immediate critical issues.
In the long-term perspective, interest in autonomous and electric vehicles will only rise, as people’s perception of the world is changing. Consumers will be looking for less physical contact, paving the way for driverless delivery systems, cashless payments, AI-enabled services, in-car purchases, and other remote operations. Also, the lockdown has showed us how unprecedentedly better nature is feeling with less transport and less pollution.
How a trusted IT partner can help OEMs adapt
There’s no way to tell how the situation with COVID-19 will unfold, but it’s evident that technology is critical for adapting to the new reality. Modernizing IT infrastructure and processes, including adopting agile methodologies and DevOps, multi-hybrid cloud architectures, and big data analytics is the way to live through any future peaks and valleys in the automotive industry.
Since some digitalization efforts need to be taken immediately, OEMs can examine their supply chains for Tier 2 software vendors that have relevant experience in digitalization. Many trusted automotive outsourcing companies have deep expertise in other IT fields that are necessary to cover the needs of automakers during the present crisis. By looking for help within their current partnerships, OEMs can save time and money that would otherwise be spent searching for new vendors. If there are no such partners within the supply chain, it’s reasonable to look for software outsourcing companies that
- are located in less-affected regions
- use agile methodologies
- have well-tuned remote workplaces
- provide flexible pricing options.
Intellias is a trusted long-term partner for automotive companies. We understand the current challenges of OEMs and are here to help. Find out how Intellias has restructured its work to keep employees safe and projects going during these troublesome times. If you see that Intellias has experience relevant to helping you deal with COVID-19-related challenges, don’t hesitate to contact our automotive experts.
Unfortunately, we cannot be sure when the COVID-19 pandemic will end, and we can’t promise it will be the last pandemic we face. People will have to get used to living with an eye on the virus’s return. This will mean more social distancing, a focus on hygiene, and more remote operations. The world will never be the same, but digitalization is one way to make it more comfortable and secure.
Autonomous vehicles, electrification, cashless payments, and mobility fit nicely into this new environment. To meet the changing needs of consumers, OEMs should preserve their partnerships with trusted automotive outsourcing companies that are able to cover their current digital needs and should continue developing high-end technological solutions for new vehicles.
Since Intellias is a trusted partner of world-renowned OEMs, our experts can guide you through digitalization processes and business transformation in the automotive sector. Contact us if you search for the correct vector of business growth in the post-pandemic world.