What's around the corner?

Over the last couple weeks I’ve participated in and listened to a few webcasts discussing how players in the automotive sector are dealing with the effects of the lockdown, and what they anticipate will happen on the return to work whenever that happens.  You might argue that now is not the time to think business, but to focus on staying safe and helping out where we can, but as managers and leaders in a major industry we need to think about both.

In terms of helping to deal with the crisis now, there are numerous examples of niche production facilities being used to produce medical equipment including Jaguar Land Rover producing protective visors using the rapid prototype 3D-printing facility and Mercedes F1 developing a CPAP breathing aid to help hospitalised patients breathe more easily.  Dealers across Europe are keeping aftersales facilities open for repair and maintenance on cars used by essential workers, ambulances and commercial vehicles operated by key fleets.  Insurers are relaxing the parts requirements for crash repairs to key workers’ cars in the event of OE parts shortages to allow non-OE and green parts to be used.

However, at some point in a few weeks, possibly more, we are all going to return to our day jobs with the task of delivering as best we can on the objectives for the year, whilst having to deal with the consequences of the pandemic, and the possibility that there will be a second wave and further restrictions next winter.  In larger organisations, statistically, some colleagues will be missing, victims of Covid-19.  It’s not a great prospect.  This week, I will focus on what I would expect to see in terms of business volumes for the rest of 2020, over the next couple weeks I’ll focus on other aspects.

At the end of March, ACEA reported that across EU27 plus the UK over 1.2 million vehicles production had been lost so far across an average of 16 days shutdown.  The most optimistic view is that production might restart, with some risk of parts shortages, roughly the same period into April, so perhaps 2.5 million vehicles lost production.  It is easy to imagine shutdowns being extended into May.  That total is across all sectors, but the majority are passenger cars and LCVs.  Manufacturers recognise revenue and profit at the point vehicles come off production lines and try to run plants at close to capacity.  There is therefore limited scope to recover this lost production within the current financial year, even if summer shutdowns were cancelled additional overtime introduced.  However, to generate cash and reduce losses, they will try to do this, so they will be trying to win back lost new car sales business over the second half of the year.  As things stand, they need to also meet the 2020 emissions targets or face huge fines next year.  Will the EU listen to any request for relief on this regulation given the exceptional circumstances?  I think it is unlikely.

This production push will then need to be sold, and some options like daily rental will probably be closed off.  There may be increased demand for LCVs for home delivery, but most of the push is going to be onto the retail customer, and therefore the dealer channel.  There will be higher campaign and incentive money behind this, but it needs to remain targeted on an emissions-compliant mix, just to complicate matters.  Some customers who have come to the end of a lease term or will do in the months ahead may be forced to make a purchase decision, but they could decide not to replace the car as their lifestyle has changed during the lockdown, or they could downgrade for economic or lifestyle reasons.  That might be to a smaller new car, but also to a used car.  This happened in some markets after the Global Financial Crisis so that used car values strengthened.  That’s not such bad news for dealers but does not help the manufacturers much.  The key will probably be having a compelling offer for those customers who are willing to buy, much like the finance-led recovery of the UK car market from 2012-2016.

The majority of aftersales business lost during the lockdown is going to stay lost for the most part in my view.  When pay-as-you-go customers bring their cars in for an overdue service in the summer after a period of low usage, they will expect their next service to be 12 months on from then.  Where customers are on service plans, it could be different as they have paid for a certain number of services within the plan, so they might take the opposite view, that they still expect to get that number.  Where regulations have been relaxed to allow annual roadworthiness checks to be deferred, those will not be recovered and the test fees and related work for the weeks of the lockdown will be lost business.  Reports from the crash repair sector indicate that accident rates have fallen dramatically – in line with distance driven – so this is also lost business.

Overall, revenues are going to be down for all players in 2020, and profits will turn to losses for most.  In some cases the lack of cash flow now will force the business into collapse or a forced sale.  The key will be how consumer sentiment will be affected, and how effectively you can target those who are willing to spend.

Stay safe, stay well.

The ICDP team remains available to all our members to provide information or act as a discussion partner to develop post-Covid recovery strategies, and consider how longer term strategies might be affected by the crisis.  Please let us know directly or through the Project Office.