Accelerating Past the Speed Bumps: Impact of COVID-19 on the Automotive Industry

Nitika: Hi everyone, welcome to the Zinnov Podcast. I am your host, Nitika Goel, and the focus of this series is on business resilience. These are difficult times, uncertain times. We, however, as people, are resilient. We are resourceful. It is this resilience that we see in leaders and businesses that we have had the privilege to work with across the year; it is this resilience that we hope to capture, at least in part, through these conversations, and hope that it helps you in your professional and personal journeys.

With this context, I would like to introduce you to our guest for today, Sivaram S, a friend, and the Head of the Zinnov Zone practice. Sivaram has been at the forefront of the research we have been doing on the pandemic, and is elbow-deep in data that will help him share a nuanced perspective on what is happening, as a function of COVID-19, across industries and in this particular podcast, more specifically in the automotive sector. Welcome, Sivaram.

Sivaram: Thank you, Nitika. Happy to be part of this discussion.

So, Sivaram, diving right in, the automotive industry enjoyed its longest bull period from 2010 to early 2019. While the situation did start tapering off, the current situation has exacerbated problems for the auto industry. Things like production stoppages, supply chain disruption, and a possible fall in demand as consumers look to cut their discretionary spending, are obviously on the table. What do you think that the top executives of these carmakers need to be thinking about at this point?

Sivaram: So, I will begin with the chronology of worries that have troubled carmakers so far.

Initially, when the outbreak began, the focus was on supply chain disruption, given China is a large supplier for auto parts across the world. As the virus spread to more developed economies across the US and Europe, production stoppages added to the list of worries that carmakers have.

However currently, the single biggest worry for top carmakers is the vaporization of demand. Now this pandemic has accelerated a drop in demand as consumers look to cut down their spending. People are going to be hesitant to invest in big-ticket items, even in the immediate period following recovery from the pandemic. It will take some time for consumers to start loosening their wallets again.

Tier 1s are equally impacted as well. They have revised guidance values and have adopted cost optimization measures. In regions that are operational now, they are not running at maximum capacity. They are still awaiting orders from OEMs.

So, top executives across the globe are looking at planned cuts in production volumes and cost optimization initiatives as well. Now, these include layoffs and furloughs. To summarize, planning for future demands is going to give sleepless nights to these executives.

Nitika: Those are very interesting points that you made, Sivaram, and taking that same thought process ahead on demand, one of the key drivers of demand are companies in the ride-sharing space. Ridership across firms such as Uber, Lyft, etc. has dropped as a consequence of lockdowns, health safety concerns, etc. Data also shows that the market valuation of these ride-sharing firms has fallen significantly, largely attributable to the shifting behavior of consumers. How do you foresee the recovery of these firms and the impact it will have on the demand?

Sivaram: Absolutely, Nitika. I think the hardest hit has been on the sharing / ride-as-a-service economy. If you look at Uber and Lyft, they lost an upwards of 60% market value ever since this crisis began. This is also due to continued lockdowns and a fear of using “shared transport” options. I don’t think that ride-sharing or ride-as-a-service is likely to see a revival back to the peak in the medium ~2 year period. This “episode” will not be forgotten easily, and consumers will no longer be comfortable with “socially intimate” ride-shares as well.

This will cause future revenue concerns for such firms as well as delay timelines for the “profitability” they are chasing in this space. This will eventually translate into an increased focus on generating revenue from alternate streams. So, we can expect a lot of services around logistics for food, groceries, or healthcare, as ridership goes down.

At the same time, the biggest beneficiary would be the half-way option of “vehicle subscription” which allows a consumer to own a vehicle over a specified period after which it can be sanitized for the next new user. Already most of the vehicle subscription platform is sold out and this is likely to continue on the other side of the crisis.

Nitika: Great. So does that mean that the traditional ride-sharing firms will look at pivoting their business models to be able to meet this changing user need and demand, or do you think that they will continue to do what they are doing but use this as supplementary sources of income?

Sivaram: Sure. I think their core focus is going to remain but there is going to be an enhanced focus on the alternate streams to generate revenue.

Nitika: So, demand is one element, but what are they going to be focusing on from an R&D priorities perspective? Obviously, in the recent past, I have seen that electrification and autonomous capabilities that have been on their radar. However, with the current situation, we have been hearing a lot of views that there is going to be potentially a relaxation of environmental regulations. And this has the possibility of impacting the EV journeys of most carmakers. How do you see this situation playing out?

Sivaram: The industry will see a revised set of trends and priorities. This is what will define the new Automotive passenger vehicles chapter. A possible victim of this crisis will be “Electrification,” a trend which has been largely driven by regulation and subsidies. Expected relaxation of emission norms and low oil prices will provide a higher runway for conventional IC engine technologies. This will make carmakers rethink their EV journeys and put high investment electric powertrain programs on the back burner, or at the very least go slow on rollouts. The next phase will be defined by “Connected.” This will be supremely important as this becomes the prime differentiator across cars. So, we can expect sustained investments in this particular space. Autonomous and its input ADAS technologies are likely to stay fully on track as well.

Nitika: So, when you are talking about ‘Connected’ right, obviously the heart or the core of ‘Connected’ is digital. If you have to look at this black swan event, do you think it will serve as an inflection point for digital transformation journeys of automakers?

Sivaram: Yes. This event is going to accelerate the digital transformation journeys of automotive firms. Now, the automotive industry as a whole will look to future-proof its technology estate. I will talk about a few key initiatives that I believe are expected to witness significant traction in the near future:

First and foremost, there is going to be a strong leverage of online sales channels. The last mile dealer and showroom network will undergo a significant disruption with people getting increasingly comfortable subscribing or buying online. Platforms that support these will see an uptick. Even if you look at auto marketing spends, there would be a shift towards personalized and digital marketing to cater to this new buying behavior.

There is also going to be an enhanced focus on Industry 4.0 to improve manufacturing productivity. Automotive companies will look to reduce the dependence on human touch as much as possible. This will further enable seamless operations during such crises.

There is also going to be an increased need for collaboration within different groups and across OEMs and T1s as well. This will essentially translate into an increase in the adoption of Cloud-based PLM and ERP systems.

• Finally, there is also going to be an increased focus on AI and ML for supplier mapping and monitoring. So, OEMs that have visibility and advance knowledge of the source of disruption will have better lead times to plan for mitigation strategies. Overall, we predict that the Automotive industry will come out stronger on the other side.

Nitika: Great. Thank you, Sivaram. So, in summary, we can all agree that carmakers are undertaking multiple initiatives to minimize the impact of this pandemic. If we have to break it across, the three components of looking at the crisis – its impact, the recovery, and the aim for growth, we can summarize that from a crisis standpoint, demand vaporization is a key concern for companies at this point. In terms of the recovery process, leveraging digital as a key resource across the value chain will be critical. And for the last component, where we are looking at growth, understanding the changing consumer behavior, and morphing business models and creating partnerships that will be able to drive outcome is something that will be key for automakers in the future.

If there is any other insight that you would like to share with us Sivaram, we would love to hear from you before we sign-off.

Sivaram: Thanks, Nitika. That was very well summarized. To reiterate, carmakers will take multiple initiatives on their road to recovery. They will reprioritize R&D initiatives and also leverage digital technologies pervasively. This will be aimed at enabling seamless operations as well as to cater to shifting consumer patterns.

Nitika: I want to thank you again, Sivaram, for taking the time and sharing your perspectives on the automotive landscape. It is important to understand how this sector is dealing with ‘the now,’ and what they are going to do next and beyond. Thank you again and stay safe.