The global auto industry is expected to witness an unprecedented and instant stalling of demand in 2020.
Recent announcements from industry leaders give a glimpse of what the automotive industry will focus on in the next years.
I’ve had the pleasure to interview Matthieu Simon, Partner at Roland Berger, on the impact of COVID19 on the automotive industry. We’ve recorded a video Q&A where we address several topics such as:
The correlation between GDP and the car industry
The penetration of online channels across all automotive segments in times of COVID
The state of aftermarket & spare parts
Top 3 transformation projects for the recovery of the automotive industry
// This article summarizes the discussion we had but you can have access to the full interview here: https://go.mirakl.com/state-automotive-industry-2020 //
The impact of COVID-19 on the automotive industry
Dickel Sooriah: We are delighted to have you! We wanted to have a talk about the situation in the car industry. As we know, it is a key engine of growth. With over 40 million people in Europe 8 million in the US, needless to say that it’s a key industry for the economy.
We've seen that COVID-19 has had far-reaching economic impacts on the car industry and the key challenge is not only to fight the pandemic but also to manage social and economic consequences for automotive in general.
So today, I wanted to really focus on how the car industry is really navigating the current period and the digital initiatives that industry leaders are expected to launch in the coming months / years.
Matthieu, we do see those wide range of changes coming for the car industry. How would you say overall the automotive industry has performed during COVID19 and how is the industry thinking about the relaunch?
Matthieu Simon: The automotive industry has been very much impacted by the crisis. Since World War II, this is the biggest crisis we've ever experienced.
When we look at the 70s, 80s, 90s crisis, we’ve always had a correlation between GDP automotive new car sales.
During the 2008 crisis in Europe, we had a 7% decrease of the GDP and correlatively a 23% decrease of the automotive new car sales market.
And more importantly: the duration of the recovery was very long. In Europe, it took 6 years to recover the full GDP loss between 2000-2008 and 2014 and, in automotive, we had a bigger drop but also a longer period to recover. We had a 10-year period to recover from 3 crises.
We could expect the same crisis structure. But, this time, it’s different.
First, we have an international lockdown that freezes everything - or has frozen everything - for 2.5 up to 3 months depending on the countries.
Taking that into perspective, Europe is expected to go from a 25% decrease to a 40% drop of new car sales in 2020, depending on the incentive schemes that governments are preparing to support the purchasing power of households which is also correlated to the economic crisis.
For 2021, we expect a +12 to +25 % of recovery of the new car sales business in Europe. We won’t recover from our current situation in 2021 and it will probably take 7-8 years at least to recover the pre-crisis level in Europe.
For the US, we actually expect a sharper drop. In the last estimate, we are expecting something between 30 % to a 40-45 % drop in the US of new car sales business in 2020.
The effects of the 2008 financial crisis on lost car sales
The good news is coming from the East and especially from China where the COVID has started earlier.
China is expecting to experience a 12-20% drop. At the end of 2021 - even probably at the beginning of 2022 – China will come back to the pre-crisis level thanks to all the support programs that the government will release.
All of these figures are supported by the incentives we have seen in France, in Germany but in the rest of Europe as well. There are several support plans in the works going in the same direction as the 2008-2009 crisis support schemes which are pushing for more green, electric & hybrid cars.
Today, all of that is necessary to support the country, the industry, or the employment. In France, we talk about 1 million of people employed directly by the automotive industry. Within this million, we talk about 40% in the upstream of the value chain, 60 % in the downstream.
The penetration of online channels across all automotive segments in times of COVID
Dickel Sooriah : Thank you for setting the context. I wanted to get your thoughts on the distribution side.
At Mirakl, we do a lot of work on retail and we've seen how people have really switched to online. We have this curve that shows that we've had as much growth in online retail over the past 8 weeks as we've had over the past 10 years in the US and in the UK. Now, the car industry's distribution is a model based on dealerships for new vehicle. Sales have struggled during the pandemic. As you mentioned, the key aspect of this latest crisis is the lockdown.
What does this crisis say about the penetration of online channels across all automotive segments? Have we seen concrete examples of home delivery, of test drive vehicles? What are the key lessons learned there?
Online shares of retail sales UK vs US (2012-2020). Source: Mirakl
Matthieu Simon : Before COVID happened, digitization was on the way in the different segments of the automotive industry. It was especially true in the upstream of the value chain in different functions, support functions, but also in the manufacturing or the engineering side of things. When it comes to the downstream aspect, digitalization was on the way for the sale of new & used cars or spare parts to direct customers, garages or dealerships.
We expect this trend to accelerate after COVID.
COVID has provoked a digital shock, a shock of demand. This accelerated digitization driven by COVID has validated multiple online customer journeys. People have started to buy everything online – healthcare products, entertainment, electronics… Tomorrow, they will expect to be able to buy much more complex products like cars or spare parts for their cars.
**Typical OEM Revenue and profit split, pre-COVID-19 - Source: Roland Berger
The key priority right now for end customers is actually COVID-free operations: how can we have them buy cars, spare parts for their cars or maintenance services without taking any risk of catching the virus.
Digital is probably a way to either simplify the customer journey or to support these COVID-free operations in tomorrow’s world.
Concrete examples we’re seeing right now are digital sales approaches. There are so many things you can do online: configure of your car, get pre-information about vehicles, access drop-off points for reparation or car collection… These few examples are setting the trend among several OEMs, car manufacturers, independent dealer groups
Before Covid, these types of services were considered as premium services. Many French startups but also car manufacturers in China for instance were working on such premium services for car owners.
Now it’s becoming mainstream.
The second part is that car manufacturers need to create or boost these offline services to remain on top of their industries. They have to revolutionize their relationships with their end customers but also with their networks of dealers, which is pretty critical if they want to survive post-COVID.
This is what customers are expecting, alongside with leasing.
Whether it’s leasing for new cars or leasing from a long-term perspective, all of this clearly paves the way for the digital player we once called the “barbarians”. Amazon and Alibaba are arriving more strongly than before because of COVID, thanks to the acceleration of digitalization.
The surge of used cars and how the industry is adapting
Dickel Sooriah : In our data, we see the used car numbers really going up so I want to talk about used car retailing: we've seen the evidence that point to online providers disrupting traditional used car dealers positions and really driving growth with digitally savvy customers where we have complete end-to-end purchasing capabilities extensive vehicle and we also have those unique delivery options. Do you think that we are going to see more of that type of used car retail development?
Matthieu Simon : We all know that the economic crisis will be deep, we talk about a minus 12% of GDP decrease this year in France and probably more or less the same in Spain and Italy.
So, to a larger extent, there will be less purchasing power from households. In the Maslow pyramid of the households, cars are definitely not coming first! In this context, many households will probably opt for used cars rather than new cars.
It's true that in the pre-crisis era we had a big already digitization of the used car business: we had the old C2C and C2B2C channels being more and more digitized with either specialized players or generalist marketplaces. Needless to say that, after COVID, this digitization will accelerate.
With all that being said, we do perceive an expectation from end customers to go more and more towards leasing. Not only leasing of new cars but also leasing of used cars. We also expect car manufacturers to push for that kind of solutions.
We see the pioneers of the car manufacturers thinking about what kind of long-term leasing they can push. Long-term leasing would like this: a car that I don’t sell in the first place but that I want to lease to the dealerships. Basically the car can be leased from day 1 for 10 years. And you would have 2 to 4 clients:
a 1st client leasing the car from 0 to 4 years
a 2nd client leasing the car from year 5 to year 7
a 3rd client leasing the car from year 8 to year 10.
On top of this, you’d have a monthly fee that includes not only the usage of the car but also would be the repair and maintenance of the car.
The customer wouldn’t own the car anymore, he or she would lease it to OEMs that would have the car repaired and maintained. For the OEMs the two benefits of that is:
To respond to the customer expectation
To get a hand on the long term (0 to 10 year)
For the end customer, the benefit is to get a car without the pain of having to resell or maintain.
Supply chains and spare parts
Dickel Sooriah : Very interesting on the leasing part! You touched on the aftermarket and that's my next question which is really the question of spare parts. We've seen those legal trade restrictions such as closed borders that have increased during COVID, the shortage of required parts, we've seen the impact of limited distribution of supplies.
What is really the state of digitalization of those OEMs, do they need to accelerate? We've seen the impact of limited power supply, we've seen how the just-in-time production strategy couple with quarantine measures, how impactful that has been. Can these guys build more resilient supply chains for spare parts?
Matthieu Simon : On the aftermarket side of the market, we have seen a clear trend of acceleration of the digitalization. OEMs need to continue to accelerate on the digitalization of the customer journey.
It's true that they are generally late when compared to the barbarians like the Amazon, Alibaba of the world which are already present in the world of the wholesale of spare part business especially in China for Alibaba in the US for amazon and again coming more and more in Europe with partnerships today.
But even when comparing to the big independent aftermarket players, the wholesale players, OEMs are pretty much laid generally when it comes to this comparison for the sale of parts especially b2b.
Then, within the OEMs world, some are more advanced than others: we've seen Renault pushing for a marketplace of spare parts which is not only addressing their garages but also other garages ; we've seen PSA pushing for similar solutions as well!
The resilience of the Aftermarket industry - Source: Roland Berger
Top 3 transformation projects for the leaders of the automotive industry
Dickel Sooriah : Very interesting! To conclude Matthieu what there are a number of leading industry players that are going to become eligible for bailout funds but they have to point to investment that would be future-proof right and so they'll need to provide guarantees so what would you say are the top 3 digital transformation projects for them. Can you share what your thoughts are on that?
Matthieu Simon : I think it's probably threefold: new cars, used cars and aftermarket.
Long-term leasing: when it comes to new car sales, the key battlefield might be releasing the long-term leasing we talked about. The OEMs would own the car and lease it to different customers for 0 to 10 years. The end customer would only pay for the use and for the repair costs. I think that's a first topic where I do expect the most advanced OEMs to take a big share of this future market
Used car markets: we do expect, in these troubled times, to have more and more used cars in the market. The players will be able to participate more and more to the used car market through their dealerships, direct network, but also through marketplaces going multi-brand, in a C2B2C fashion.
Aftermarket: Aftermarket has always been a growing market. It’s always been a resilient and profitable market. We have a market which is likely to continue to grow in the next coming years, in terms of volume and value.
Dickel Sooriah: Perfect. Thank you very much Matthieu for sharing your unique insights on the transformation and the acceleration of the transformation that the car industry is going through right now! It was really good to spend this morning with you and I hopefully will talk soon to discuss how the platform economy is penetrating the automotive industry.