How to mitigate the impact of COVID-19 on automotive sector
Automotive sector is facing many challenges like disruption in supply chain, drop in vehicle sales, etc due to COVID 19 pandemic. According to Sharadhi Babu, automakers must try to strategise the operations to improve their resilience in the coming days and be prepared for the future.
Automotive sector is facing many challenges like disruption in supply chain, drop in vehicle sales, etc due to COVID 19 pandemic. According to Sharadhi Babu, automakers must try to strategise the operations to improve their resilience in the coming days and be prepared for the future.
Declining sales, CO2 penalty, changing customer demand, global political uncertainty are some of the many issues faced by the automotive industry in the wake of COVID 19 pandemic. Initially, the concerns were regarding the disruption in the export of Chinese parts. This has further escalated to the manufacturing obstruction across Europe and
the US.
These situations are creating uncertainty which is making it difficult to predict the trajectory of recovery.
Here are a few of the key challenges faced by the automotive industry:
Disrupted supply chain: The supply chains were the first to be disrupted as the OEMs heavily depend on just-in-time production. Almost two-thirds of auto production in China was directly affected due to industrial shutdown. This majorly affected their suppliers as well. Further, the massive shortage of Chinese parts adversely affected global auto production as well.
Halt in manufacturing: The situation in China has started to improve, but car manufacturing in the US and Europe is facing huge uncertainty as to when normal production will resume. Factors like improper legislative action, lack in the demand of parts in the supply chain have led to severe consequences like joblessness, drop in automotive production, and a crucial impact on GDP.
Liquidity: The increasing need for money becomes critical during this time. Few OEMs have low liquidity and currently they are faced with minimum cash flows. Their remaining cash easily gets depleted in two months. This has led to several OEMs negotiating for higher credit lines. Further, industry consolidation has been on the rise due to the drop in market capitalization. There are higher chances of some industry players going out of business due to a lack of additional funding.
Drop-in sales of vehicle: China is the largest light vehicle market in the world. There was an 80 per cent sales drop in February 2020 in comparison to January. This is an indicator of the direction in which the global market is going with the impacts being visible. The global light vehicle sales forecast in all the major regions indicates that there will be a 12 per cent drop in the market by 2020 and the situation is unlikely to change.
Corrective measures
Given below are some of the practical steps to be taken to manage the crisis:
- Establish a constant relation with the customers through online and mobile channels
- Identify and prioritize cost-out measures across the enterprise
- Optimise the working capital and find measures for rapid cash-flow benefits
- Revise the assumptions in the business forecast and be prepared for the extreme scenarios given the level of uncertainty in the market
- Identify all the sources of collateral for additional borrowing as a safe option during scenarios when liquidity becomes an issue
- Employee safety must be a primary focus as a complete recovery consists of the active participation of the workforce.
OEMs must come up with concrete steps to take care of the disruptions that are created now. They must try to strategize the operations to improve their resilience in the coming days and be prepared for the future. The OEMs must holistically react to the crisis and align their thoughts along these three R’s; Respond, Reset and Renew.
About the Author:
Sharadhi Babu is the CEO of AXISCADES - a leading, end to end engineering solutions and product company
