The aftermath of the dreaded COVID-19 and its variants on economies worldwide left little to the imagination. Amid the scene of devastation that followed the pandemic, there was a massive bedlam in the global industrial arena. The onset of the coronavirus was particularly destructive for sectors such as F&B, aviation, electronics, and automotive. Indeed, the automotive industry, which, pre-pandemic, was remnant of numerous disruptions such as electric mobility, ridesharing, and the like, stood stripped of its bright future, as experts began to wonder, whether the sector would ever witness light at the end of the tunnel.
When the pandemic was at its peak in 2020, the automotive sector seemed to be in one of its worst phases. Already faced with a host of problems, like environmental issues due to emissions and changing consumer requirements, automakers had to deal with further issues as COVID-19 spread, like slumping car sales and political uncertainty. As per rating agency Ind-Ra, automobile sales in India were expected to decline by 25% in 2020-2021. The onslaught of the pandemic has thus exacerbated the existing challenges of the automotive industry, causing unprecedented uncertainly among market players.
As per experts, even though the sector has begun to witness a slight improvement in 2021 as opposed to the disastrous situation last year, it still has a long way to go before it can reach pre-pandemic levels. The following paragraphs comprise a gist of the many critical challenges facing the automotive industry during COVID-19 that’ll help in understanding the present scenario in the vehicle manufacturing space.
Top 6 key challenges in the automotive industry
#1 Manufacturing shutdowns
The onslaught of the pandemic manifested in the form of massive production halts, given intense social distancing protocols and nationwide lockdowns. Governments the world over enforced health and safety regulations, making manufacturing shutdowns one of the most significant challenges of the automotive market. The virus outbreak presented a huge question pertaining to whether normal production would ever resume; in response, 2021 witnessed China returning to production, although not with the same rigor as before. The United States and Europe, however, are still struggling to get back to regular vehicle production. Recent studies depict that in April 2020, vehicle sales in Europe fell by 84% as opposed to April 2019.
Manufacturing shutdowns accentuated the already existing automotive industry challenges of excess production and resource shortage. They also led to massive financial losses, directly impacting GDP. Even after production commenced in 2021, the sales graph remained linear. To that end, automotive companies will now have to alter their approach to car-making – embracing industry 4.0 for efficiency and manufacturing resilience takes the cake here.
In addition, experts opine that manufacturing shutdowns may continue to remain one of the critical challenges facing the automotive industry during COVID-19. This indicates that governments will now have to ease emission laws to incentivize battery electric vehicle adoption. Automakers will also have to speed up the technology shift in the automotive sector to move away from conventional manufacturing standards and processes.
#2 Less vehicle sales
Reduced car sales emerged as one of critical challenges facing the automotive industry during COVID-19. According to reliable estimates, pre-pandemic numbers for auto sales in the United States alone was forecast to be between 16-17 million units in 2020. The onset of the pandemic brought forth a spate of financial losses due to statewide lockdowns, social distancing regulations, and shutdown of manufacturing units. At the time, the prospect of a possible vaccine seemed dim enough; and what with added restrictions, car sales witnessed an all-time low.
This of course does not come as a surprise; in the event of a pandemic, purchasing a vehicle would be the least priority for consumers. Despite the anticipation, the numbers are pretty shocking – according to the Society of Motoring Manufacturers and Traders, the UK automotive industry lost GBP 1.3 billion in sales in 2020. Lack of sales have led to excess inventory, high levels of debt, and demand uncertainty.
#3 Massive layoffs
Loss of labor is an overt impact of manufacturing shutdowns. As the coronavirus spread, many companies had to resort to massive layoffs, that emerged as one of the crucial challenges of the automotive market. Nissan for example, closed its unit in Barcelona, Spain, after reporting huge losses. Many companies in Europe had to put their workforce on short-term work during COVID-19. Swedish automobile maker, AB Volvo, declared last year that it planned to lay off 4,100 white-collar positions in its company in H2 2020.
Despite closing shop, automotive companies encouraged its workforce to apply for unemployment benefits and other benefits. For example, when BMW’s U.S. production facility in Spartanburg, South Carolina, delayed its opening date until April 30 instead of April 12, the German automaker stated that it will furlough 11,000 of its employees at the unit until the extension date, while also providing them with healthcare benefits. Although the industry is beginning to recover, dealing with the workforce is likely to remain one of the consistent challenges of the automotive industry, as it will take quite a while before it is at a stable position again.
#4 Disrupted supply chain
The onset of COVID-19 brought about an immediate halt in current production, disrupting supply chains the world over. China, that was impacted by the pandemic at the outset, had almost two-thirds of its vehicle manufacturing affected due to the nationwide lockdown, which severely impacted the supply chain. Auto supply chains are, more often than not, spread across geographies; with every country imposing its own protocol post the pandemic, supply chain management took a massive hit, emerging as one of the most vital challenges faced by the automotive industry during COVID-19.
Automotive supply chains have faced more than disorganization and disruption; they will now be under additional pressure, due to the bottleneck in semiconductor manufacturing and the reinstatement of electric mobility. General Motors for example, in January 2021, declared that it aims to have a complete portfolio of zero-emission vehicles to sell, by 2035. The pandemic clearly brought forth the fragility of the existing supply chain analytics, highlighting that resilience and transparency through digitization and other agile practices is the only way forward for automotive companies.
#5 Liquidity
Liquidity was the biggest challenge facing the automotive industry last year. The pandemic regime reemphasized that cash is indeed king. Production shutdowns and slumping sales gradually led to heavy financial losses, with OEMs operating on minimal liquidity. Lack of funds is likely to result in many small-time automotive companies going out of business. Cash reserves were on an all-time low during COVID-19; the situation is not likely to reverse soon enough.
As financial automotive industry challenges continue to reign, automakers will need to secure government support measures to secure liquidity assistance. Using artificial intelligence in automotive market to predict real-time cash influx and establishing a liaison with financial institutions for investments in connected technologies and automation are also some options automakers can tap into as they deal with liquidity challenges of the automotive industry.
#6 Change in customer behavior
The collapse of the economy, rise in prices, and the all-around dire state of public health and financials brought about a considerable change in the buying patterns of consumers. To begin with though, during a critical time like the pandemic, purchasing a car was the least of everyone’s worries. Scarce finances and uncertainly about the future led to consumers backing out of making vehicle purchases, that emerged as one of the key challenges of the automotive industry.
For the ones that could afford, buying cars from dealerships and offline showrooms was next to impossible, given the stringent protocol during lockdowns. To combat the same, post COVID-19, many automakers attempted to go offline, offering short-term subscription-based lease models for customers, making car purchases digital, and undertaking numerous other steps to restore declining consumer confidence.
Although 2021 saw the resurgence of a percentage of the consumer base, overall, customer footfall is still low and is likely to remain one of the significant problems in the automotive industry for a few years. Changing customer behavior may, however, lead to considerable alteration in business models of automakers, ushering in a new era for electric mobility, connected cars, and automation.
Experts anticipate the automotive sector to be replete with risks and challenges for quite a while; it may take years before pre-pandemic success levels for this industry are restored. In the years ahead, automotive companies must work on resolving the existing challenges through strategic measures. To begin with, opting for digital modes and bringing about convenience for consumers could work. Further on, automakers need to completely shift from the conventional manufacturing models to automated working processes while ensuring flexibility.
Adoption of the latest technologies and bringing connected vehicles to the mainstream are likely to open up new income sources for automakers in the years ahead. As governments help out by bringing in changes in emission laws, automotive companies work on creating a more resilient supply chain, and more intense R&D programs are carried out to set new standards, the automotive industry could slowly witness a rebound within the next half a decade or so.