COVID19 impact on automotive sector/industry

The global automotive sector is undergoing a period of substantial change as its  macroenvironment changes substantially, with major changes in technology,  consumer attitudes, political situation, markets etc. This is having substantial knockon effects for competition and industry structure. This period of uncertainty has been  exacerbated by the Covid-19 crisis.

In this paper, discuss how the macroenvironment, including Covid-19, is changing the automobile sector’s industry structure. Following from this, discuss and compare the  strategic responses of two global carmakers (of your choice). Evaluate these  responses and discuss how well the strategies fit the changing context of the industry.

Answer

Covid-19 Impact on Automotive Sector

Unquestionably, Covid-19 left a swift and deep cut on the automobile sector that is globally integrated. The reported challenges entailed a disruption of exports from China, interrupted large-scale car production across Europe, and closure of various motor vehicle assembly plants in the USA. Even before Covid-19, the global automobile sector experienced issues like retarded global demand and the potential rise in mergers and acquisitions as individual companies could not singly attain their planned goals in the tough economic environment. The report dwells on the macroeconomic factors that potentially threaten the automobile sector’s success, alongside the strategic moves that big market players like Mercedes and Tesla, Inc. deployed to inculcate sustainability goals and proposes measures which the industry players could implement to ensure business continuity.

Individualism Transportation “Renaissance”

Social distancing became synonymous with the Covid-19 pandemic. Car sharing, electric scooters, and ride-hailing got impacted during the pandemic. According to Wu et al, (2021), car sales also plummeted, probably due to movement restrictions and job losses. Covid-19 necessitated structural changes within public or shared transport mechanisms. Working from home reduced commuters, including those with their cars. However, the risk of getting infected from public transport made the demand for own cars a priority because it was considered reliable and safer. Personal car purchases increased both in the United States and Europe that reflecting the need for owning personal cars. Consumers also hoped for future government support regarding personal car ownership. Consumer buyer interest in cars rose because it placed them strategically advantaged against acquiring the infection, unlike public transport. Individual car sales in china significantly rose while sales for passenger cars muted despite the lockdown eases. Factory closures also caused many manufacturers to cease operations until recently when gradual easing on the lockdown allowed them to resume manufacturing.

The majority of young people force car manufacturers and dealers to increase their online presence. According to Bauer and Weber, (2021), many people 85% who never owned a car in the past consider online platforms as suitable places to make purchases. The online platforms applied to young people in both India and China. However, with the COvid-19 pandemic, the number of potential car buyers reduced. About half preferred public transport to their cars, as more people desisted from ride-hailing during covid-19 pandemic stating safety and health concerns as the main issues. Online platforms increasingly gain ground among the young. Other than an increased choice for digital platforms, customers globally shift their attention towards online platforms when seeking products and services. About 46% of the global automobile consumers agreed that they would choose online platforms rather than physically visiting car dealerships when comparing deals and financing options. The fear of contracting the covid-19 virus encouraged most people to rely on online platforms.

Figure 1: Potential Car Buyers Percentage under 35 years

Mobility Concepts

Infection fears and social distancing requirements made most people prefer owning their car to using public transport or car-sharing. Bauer and Weber, (2021) pointed that the new mobility concept failed across many regions across the world and people slowly return to ride-hailing and car-sharing. Despite most ride-hailing companies shutting operations, they found ways out over time. Among the concepts include low-cost car rentals. Eased containment measures mean that shared transportation concepts would rise. The mobility concepts might not be permanent and people might get back to ride-sharing. Car manufacturers do not have to modify their cars ostensibly to facilitate social distancing enforcement.

Small Firms Might Not Recover

Firms that were not well prepared to handle covid-19 pandemic economic effects might not get back on their feet. Small car manufacturing companies would either merge or get acquired because their reserves cannot sustain the crisis demands. Belhadi et al., (2021) pointed that reduced need for transport solutions during the lockdown necessitated the closure of most manufacturing factories. Car manufacturing companies that merged with other companies managed to sustain their production despite the hardships. Suppliers in the automobile sector also faced challenges moving products and raw materials to the respective factories, causing most of them to shut operations in the meantime.

Reduced Income and Unemployment

Unemployment rates significantly rose during the Covid-19 pandemic. The closure of mega car manufacturing and assembling plants in the United States affected the labor markets. At least 35 million people in the US alone filed jobless claims. According to Belhadi et al., (2021), the labor crisis was no different in the European automobile sector. Unemployment aligns with income loss, making it difficult for people to sustain their basic needs, let alone save money for buying cars. Consumers scaled down their consumption of durable cars. Consumers scaled down their spending on durable goods like automobiles. Car sales plummeted in the 2008/9 financial crisis and so replicated during the Covid-19 pandemic in major regions like the US, China, and Europe.

Low Automotive Sales

Unemployment rates directly link to car sales in Europe and US. Covid-19 resulted in more damage to people’s jobs and income sources. Wu et al, (2021) opined that most individuals reduced their spending on automobiles and car parts. With normalcy slowly returning, the number of car sales is anticipated to rise. A similar situation was reported in 2008 when the financial crisis caused car sales to plummet. The covid-19 crisis is worse than the 2008 financial crisis. Wen et al., (2021) explained that passenger truck sales reduced by almost 48% as of March 2020, during which unemployment was the highest since the 1940s. Despite no notable data to reveal Covid-19 impact on European and China’s car sales versus unemployment rates, it is reported that their case was no different.

The unplanned lockdown affected the raw materials supply chain. Covid-19 significantly affected the US automobile sector. According to Wu et al, (2021), consumer confidence in the automobile sector also dropped significantly, which affected car sales. Other than consumer confidence, credit market freeze negatively affects car sales. If potential car buyers cannot access credit facilities, the number of car sales significantly drop. The majority of car sales in the US are debt-financed, and data findings show that debt finance accounts for about 10% of debts in most households. The automotive sector benefited from high sales when the majority of people secured jobs, during which there were also low default rates. Affordable loan rates also encouraged most consumers to acquire loans for buying cars.

Figure 2: US car sales versus unemployment

Government Bail Out

The government’s involvement during harsh times impacts sales in the automobile sector. Governments offered scrappage subsidiaries which incentivized those trading in their old cars for new ones. Incentivizing car trade-in improves car sales. Scrappage schemes differ across countries, but the government’s involvement is highly encouraged even in the covid-19 pandemic. Scrappage systems could work best if implemented on electric and hybrid cars. Tax exemptions and subsidies for those purchasing electric cars encouraged more people to buy cars in china. According to Wen et al., (2021), car sales fell by 56% in the first quarter of 2020, however, the sales started rising, thanks to the subsidies and tax exemptions. European nations also incentivized electric car purchases. The tax exemptions and subsidies significantly improve car sales across the world during tough economic times. Low spending capacity, high unemployment rates, and the automobile sector that was already ailing even before the covid-19 pandemic outbreak necessitated government interventions that would drive up demand.

Demand for Electric Vehicles

Covid-19 caused the global oil prices to drastically fall, as the demand plummeted. The consistent drop in oil prices might affect the sale of electric vehicles. According to Wen et al., (2021), electric vehicle sales rose to 2% (2019) from 1% (2018). Electrical vehicle sales in Norway accounted for 41% of all new car sales. Electrical vehicles accounted for 14% of cars sold in the Netherlands. European countries target a 100% transition to electric vehicles in the future. Despite the ambition to attain fully electric cars by 2035, the low oil prices could slow the goal attainment.

Low oil prices could affect car owners’ purchase decisions for a new vehicle. However, oil price drops are temporary, therefore, the effect on electric vehicles demand could be short-lived. Inoue and Todo (2020) stated that an oil price drop would equate to reduced pump prices. The prices of petrol are never the same as market oil prices. Excise duties vary across Europe alongside other tax margins. Pump prices might temporarily drop by $3 or $4 which might not lure people into buying fuel cars. Oil price drops, therefore, might only affect electrical vehicle purchases in the short run.

Customers Taking up Electric Vehicles

Electrical vehicle sales are at an all-time high. Most manufacturers set up new factories to specifically produce and assemble electric cars. The car manufacturers report that they are soon acquiring a break-even in sales. According to Inoue and Todo (2020), top manufacturers offer a wide variety of electric vehicles that make the electric vehicles market highly competitive. Other than the introduction of additional models, the latest battery packs can reach 500 kilometers in a single charge, leaving electric vehicles a better option for clients seeking new vehicles. Governments in some countries provide full financing to individuals seeking to purchase electric cars, or offer tax exemptions in the least. The higher the production capacity, the lower the manufacturing costs of electric cars. Manufacturing companies in the automobile sector could lower electric car selling prices if they mass produce them, thanks to economies of scale. The lower purchase price of electric cars relative to petrol-powered cars could attract more buyers, both now and in the future. Covid-19 came with financial restrictions, and electric vehicles have minimal operational costs alongside zero emissions. More companies already invest in electric car production, for instance, Volkswagen already secluded $ 60 billion to improve its infrastructure to sustain electric car production. Supplier and manufacturers’ competitiveness raises consumer confidence.

Regulations Necessitating Car Electrification

Regulatory measures are a core reason behind electric cars. Inter-governmental efforts focus on reducing carbon (IV) oxide and other greenhouse gas emissions. City emission requirements and regulations shape the adoption of electric cars. European Union’s emission regulations require car manufacturers to lower their emissions to 95 grams per kilometer of carbon (IV) oxide. Car manufacturers refine their technologies towards reduced carbon IV oxide emission. It is anticipated that by 2030, between 30% and 40% of the new cars sold in Europe would be fully electric. The gasoline ban and regulations might not be lifted in Europe any soon and the fight for electric vehicles in the future. Market players in the automobile sector are left with no option but to expand their investments in electric car manufacturing, in place of internal combustion cars.

Supply Chain Adjustments

The supply chain within the automobile sector lies within regional hubs. Regional hubs produce car parts which are sent to car assembling plants. Inter-regional linkage disruptions during the Covid-19 pandemic affected the entire car manufacturing. Hubei Province’s outage resulted in the closure of many factories associated with car manufacturing. The lockdown in china affected car production in many parts of the world. Automotive supply chain complexity makes a slight disruption costly and difficult to sustain. Risk mitigation is also a problem because it is not known if such pandemics could affect a region or countries like Covid-19 that affected the entire globe. The automobile sector entails over 10,000 suppliers located in different positions within the market chain. The global downturns squeezed into suppliers’ margins, forcing them to raise commodity prices. It is relatively costly to identify suppliers who meet quality and safety specifications. Automobile companies could resort to large inventories as means of cushioning themselves against potential threats of supply chain cuts, despite high storage costs.

The covid-19 pandemic could limit the re-engineering of existing supply chains. However, car manufacturers could generate new supply chains for their new models. Electric vehicles require fewer parts compared to gasoline-powered cars. The battery makes the main component other than the body parts. Self-sufficiency is not feasible in the car manufacturing sector because different raw materials are sourced from all over the globe. Batteries in electric vehicles require raw materials some of which are only sourced from Africa or Latin America.

Auto-parts suppliers and OEMs

Lockdowns, production cease and unemployment heavily disrupted the supply and demand for auto parts and OEM (Original Equipment Manufacturer). Car producers forcibly spend huge costs in fixed capital as they need significant amounts to fund their working capital. Managements reduced the funding on research and development among other non-essential costs. Car manufacturers further opted for additional credit options to maintain liquidity during tough economic times. The production facilities that shut down impacted the volumes of car parts manufactured. Revenue loss affected car producers’ liquidity forcing them to source external cash to stay afloat. Covid-19 also affected the supply patterns among car parts and OEM manufacturers. Covid-19 pandemic caught most auto parts manufacturers with significant liquidity buffers.

Tesla Strategy

Tesla is among the most valuable firms in the automobile sector, having surpassed General Motors. Tesla entered the motor industry with the motive to address sustainability issues. The sustainability imperatives included a sustainable business model that used zero emissions for the transport sector and a carbon-neutral economy transition. Government pressure on auto manufacturers to reduce carbon (IV) oxide emissions from combustion engines. Rather than going for the minimalistic approach, Tesla went large on renewable energy. Tesla had in mind what society wanted and choreographed disruptive innovation. Tesla penetrated the German car luxury companies that dominated the high-performance car market. Tesla produced luxury electric cars that floored most of its competitors.

Tesla disrupted the luxury automobile sector in five key stages. Tesla solidified the base for sustainable cars in the long term. The company inspired it is new and incumbent stakeholders about their future. Tesla developed a lifecycle that incorporates all manufacturing elements up to product disposal. The company runs an evaluation stage that actualizes the possibilities into realities. The realization phase allows Tesla to produce tangible outputs in form of electric cars and other products. Tesla formalized their electric vehicle innovation. Tesla identified, launched, and sized Disruptive Innovation based on sustainability to achieve efficiency in its operations. Tesla applied structured inquiry within classic marketing Cs (customer, company, category, competition, and culture).

Tesla necessitated the entire automotive industry to change its production. Upon successfully penetrating and disrupting the market with electric cars, Tesla’s competitors improved their research and development and now produce hybrid and fully electric cars. Rajamohan, et al., (2020) stated that Tesla uses artificial intelligence in its production, as seen in its fully autonomous cars. Tesla integrates software into their electric cars. Tesla cars can update their software like updating an iPhone. Tesla is probably the most tech-savvy electronic car ever manufactured as at now globally. Tesla popularized electric cars and made them a reality and they proved reliable over the years. It was not until Tesla commercialized electric cars production that other companies saw that it is possible to do the same.

Mercedes Strategy

Mercedes dominated the German car markets for decades not until Tesla commercialized electric cars. Rajamohan, et al., (2020) explained that Mercedes does not want to be left out and have plans underway to become fully electric when the decade comes to a closure. However, the shift to electric cars depends on market conditions. Mercedes also wants its future cars to be software-driven and emission-free. By the close of 2022, the Daimler conglomerate plans to install battery electric vehicles (BEV) throughout all their motor segments. The company wants to manufacture electric-only cars from 2025. Consumers would have the option to choose electric alternatives across every model which Daimler manufactures. However, Mercedes is keen on maintaining its profitability levels as it accelerates its transition from combustion-powered to electric vehicle technology.

Pressure from new market entrants like Tesla and Lucid, Mercedes immensely increased their research and development funding. According to Rajamohan, et al., (2020), Mercedes plans to invest at least €40 billion between 2022 and 2030 on battery electric vehicles. Mercedes plans to set up giga-factories that manufacture car batteries. The company plans to use standardized batteries through all its models. Mercedes plans to install plug-in charge systems across the globe for which customers would require no authentication. Already Mercedes have 530,000 charging points strategically located across the globe. Already, Mercedes works with Shell to increase the number of recharging points within China, Europe, and North America.

In summary, the automobile sector had its share of disruption from sustainable production way before covid-19. Tesla and other market players spearheaded the shift from combustion to electric cars. Governments also incentivized electric car ownership in most countries, hence the reason behind high uptake in Europe, especially Norway. Covid-19 disrupted car parts production. Covid-19 also disrupted car sales because many people were rendered jobless. The supply chain in the automobile sector became disrupted forcing many companies to increase prices because they went the extra mile in acquiring the products. The companies that produced cars also closed operations temporarily with some shutting because they could not sustain their working capital.

References

Bauer, A., & Weber, E. (2021). COVID-19: how much unemployment was caused by the shutdown in Germany?. Applied Economics Letters28(12), 1053-1058.

Belhadi, A., Kamble, S., Jabbour, C. J. C., Gunasekaran, A., Ndubisi, N. O., & Venkatesh, M. (2021). Manufacturing and service supply chain resilience to the COVID-19 outbreak: Lessons learned from the automobile and airline industries. Technological Forecasting and Social Change163, 120447.

Inoue, H., & Todo, Y. (2020). The propagation of economic impacts through supply chains: The case of a mega-city lockdown to prevent the spread of COVID-19. PloS one15(9), e0239251.

Rakshit, B., & Basistha, D. (2020). Can India stay immune enough to combat COVID‐19 pandemic? An economic query. Journal of Public Affairs20(4), e2157.

Rajamohan, S., Sathish, A., & Rahman, A. (2020). Impact of COVID-19 on stock price of NSE in automobile sector. The International Journal of Advanced Multidisciplinary Research7(7), 24-29.

Wen, W., Yang, S., Zhou, P., & Gao, S. Z. (2021). Impacts of COVID-19 on the electric vehicle industry: Evidence from China. Renewable and Sustainable Energy Reviews, 111024.

Wu, X., Zhang, C., & Du, W. (2021, July). An analysis on the crisis of “chips shortage” in automobile industry——Based on the double influence of COVID-19 and trade friction. In Journal of Physics: Conference Series (Vol. 1971, No. 1, p. 012100). IOP Publishing.

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