New mobility and the pandemic
In the war against the highly contagious new coronavirus and the COVID-19 pandemic, the transportation industry has helped tremendously in the fight, temporarily transforming itself into an emergency army for desperately needed production of supplies, such as face masks and shields, gowns, and ventilators, for the frontline healthcare soldiers. However, what does the future hold for a global transportation industry coming back from the war after a near production halt?
Some say, look no further than where the pandemic originated and where industry has started to come back online. The global industry should watch China for rebound insights, according to an analyst at data and analytics company, GlobalData.
“A gradual return to work in Hubei province—the original source for the virus—is certainly a very positive sign,” said David Leggett, Automotive Analyst at GlobalData. “However, manufacturing firms have to contend with a still fragile workforce and reactivating stalled supply chains. It will be a while before they can get anywhere near to normal operations.”
The Chinese government has announced it will maintain subsidies for new-energy vehicles (electric vehicles and plug-in hybrids), an indication that it will support that part of the industry in recovery. Government support should help the sector in the early stages of recovery, and it looks like a sales rebound has begun.
“Volkswagen this week said it expects Chinese passenger vehicle sales to rebound to around 1 million units in March from a low of around 240,000 units in February—when the market declined by over 80%,” said Leggett, in early April, of the fluid situation. “A significant rebound to demand and manufacturing in China will boost industrial confidence around the world over post-COVID-19 recovery prospects later this year.”
Tracking changes in Asia
The pandemic is influencing Chinese customer preferences related to transportation choices, says VW, the top OEM in the country. There are indications that the pandemic is increasing the desire to travel in a protected space.
In a recent study, by the market research institute Ipsos, two out of three respondents say that they prefer their own car to public transport—twice as many as before the corona outbreak.
A mobility-preference poll, conducted by Ipsos of 1620 Chinese citizens in late February, found that fear of the virus was changing their views. Private cars jumped from third to first place in terms of preferred means of transport, while buses and metros lost ground to a similar extent. Individually driven two-wheelers, on the other hand, maintained second place. Consulting firm Kantar came to similar conclusions, its researchers saying the epidemic is causing people to rethink how they will move around in the future, which could mean increased desire to buy a private car.
Another key finding of the Ipsos study is that two-thirds of all respondents who do not currently own a vehicle, want to buy a car within six months, and for three out of four first-time buyers, protection against infection is a key reason for their purchase intention.
Digital touchpoints needed
Ipsos researchers were especially keen to understand how the new coronavirus has changed consumer’s attitude to the new-car buying experience in China, as it is the largest automotive market in the world. Among the learnings were that non-car owners have a higher intention to acquire new cars due to lack of trust in public transportation, and they want more digital touchpoints, health-related features, and online sales and aftersales services.
Car manufacturers will need to adapt to the changes in consumer’s attitude and behavior. The quick survey suggests that automakers should consider different product offerings, shift more resources to online communication touchpoints, and broaden the sales and aftersales services to online territory.
GlobalData agrees that digital solutions for car purchases that avoid human contact is one area of retail that will get a boost from the pandemic. Again, China is the early indicator of this trend.
“We are already getting an indication of change ahead by seeing how dealers are approaching sales in China, which is a few months ahead of the western world in terms of managing the outbreak,” commented Mike Vousden, Automotive Analyst at GlobalData. “Geely, one of the country’s largest automakers, has already launched a no-contact car buying service; the disinfected vehicle is delivered to the customer and the keys are sent separately via a drone.”
However, completely “faceless” vehicle buying is not likely to take off as quickly in markets used to a more traditional way of doing things.
“In the U.S., we are likely to see ‘halfway house’ solutions evolve, with dealers offering virtual tours of vehicles or negotiations over video calling services,” Vousden continued. “In the UK, a startup from the founder of Zoopla called Cazoo, which aims to bring the simplicity of digital retail to the used car market, managed to raise £100m from investors in March—despite current market uncertainty. One of the reasons investors were attracted to Cazoo is its focus on digital sales, which is expected to be a big plus when the pandemic comes to an end.”
While GlobalData expects a relative return to normality once the pandemic passes, it also sees a longer-term shift away from face-to-face sales as customers become more cautious about their interactions with others.
While the auto industry started seeing the initial signs of a demand slowdown in the beginning of 2019, the pandemic helped to hasten the market decline. The initial impact of COVID-19 on the automotive supply chain and production was localized to China in January. However, with the spread of the virus to Europe in February and the U.S. in March, global management and strategy consulting firm Zinnov’s analysis found that the automotive industry’s key concern shifted from supply chain disruption to demand vaporization.
The ongoing pandemic has impacted OEMs and Tier 1s alike, who have collectively lost about 20 to 40% of their market value since the start of the outbreak, according to experts at Zinnov. Its findings align with those of Ipsos, in that the sharing/ride-as-a-service economy has been impacted to a greater degree. Uber and Lyft have lost upward of 60% of their market valuations as consumers are increasingly opting out of the sharing economy. The forced lockdowns and social distancing norms have further intensified this problem. All these factors are causing future revenue concerns as well as delay in realization of the already elusive profitability in the mobility-service space.
Meanwhile, OEMs are aggressively leveraging technology, pivoting their business models, and re-engineering their processes and talent to recover from this crisis. Given the changes across the value chain, Zinnov experts believe that automakers will reprioritize their R&D initiatives on the other side of recovery, and only two of the four key trends, namely connected and autonomous (and not electrification and shared mobility), are likely to attract a majority of this spend.
Shared-mobility programs are expected to take a hit, given the shift in consumer preference toward self-owned cars, according to Zinnov. However, evidence suggests that vehicle subscriptions will become a growing trend, with automakers and software companies spending on software to enable subscription platforms. Auto companies are also most likely to focus on enhancing manufacturing productivity and efficiency by leveraging plant automation, Industry 4.0, cloud-based ERP, and PLM systems.
“There will be a definitive shift in the way auto companies will channelize their investments in the aftermath of COVID-19,” elaborated Sidhant Rastogi, Managing Partner, Zinnov. “In the near-term, the relaxation of emission norms, [and] drying up of environment/EV-related subsidies, might force certain automakers to put high-investment electric powertrain programs on the back burner. In the long term, however, there will be renewed focus on making their digital investments count by enabling digital/touchless walkthrough and delivery experiences, bringing in greater efficiencies by leveraging Industry 4.0 and automation, and innovating on the existing business models to align to the post COVID-19 reality.”
While the speed and scale of COVID-19 fallout has been focused mostly on future recovery of vehicle demand, IHS Markit has been digging deeply into the impact of the pandemic on the global auto industry’s technology deployment as well as its short-, medium-, and long-term research investment priorities.
In the survey conducted in late March and early April, OEMs and suppliers expect significant disruption in R&D, the impact concentrated in the coming year. Interestingly 28% of respondents think COVID-19 will impact revenues beyond the next 12 months, while only 20% indicated that their automotive R&D activities will be impacted beyond the next 12 months. Respondents in Asia (China in particular) indicated a greater concern on long term R&D impacts (over three years) compared to Europe and North America. Most North American respondents think the impact on R&D will disappear within three months.
Respondents expect a major refocus on in-house capabilities and development, especially at large- and medium-sized OEMs and suppliers. Several respondents voiced concerns about the long-term survival of startup companies born to complement or bolster incumbent R&D activities, particularly in emerging technology areas. One respondent summarized these concerns well: “As venture capital money dries up, many startups, especially in LiDAR development and autonomous driving software, will disappear.” In general, respondents expect greater “natural selection” among startup companies in the supply-chain space rather than OEM space. They have, however, indicated that some of the EV startup companies that were already struggling upon entering the market will not survive given market conditions.
Mitigating the impact
IHS Markit findings suggest that the sustained R&D investment levels in e-mobility, autonomy, and connected car development are unlikely to vanish due to COVID-19, but the financial impact of the pandemic is likely to drive more companies to explore merger and acquisition opportunities to support the sustained investment level. Respondents suggest that this consolidation trend, which was already evident before COVID-19, might accelerate further.
The vast majority of respondents indicated that government aid, to support advanced research in particular, was now more important than ever. Some of the most significant state-funded advanced research programs are the European Comission’s Horizon 2020 program for multiple industries, the U.S. Department of Energy support of powertrain/electrification projects, and the UK Autodrive funding of autonomous vehicle research.
Finally, some respondents mentioned “cash for clunkers” or other similar incentive schemes as a potential tool to restart demand. This would represent a repetition of scrappage schemes the U.S., European, and Chinese governments launched in response to the 2009 financial crisis. However, some respondents at larger OEMs admit that spending on cars is unlikely to be the highest priority for budget allocation as consumers seek a return to normal.