#Financing

The global impact of Covid-19 on the automotive industry

Oct 23, 2020 - 12 min read
James Powell, Head of Global Automotive Strategy at Sopra Banking Software

The coronavirus pandemic is causing disruption and economic hardship around the globe. From Asia to Europe to North America, no country has been spared the virus’s effects and its economic fallout.

Likewise, almost all sectors have been affected by the pandemic, and the globally integrated automotive industry is no different. Factory closures, supply chain disruption and diminishing demand have all taken their toll. And, as a result, some auto dealers will close forever, causing the floor plan lending market to contract. 

In response, many governments around the world have adopted a similar approach to support packages, including help for consumers via stimulus payments, (time-limited) furlough schemes, slashed interest rates and emergency loans for businesses, just to name a few. 

However, the impact the pandemic has had on people’s work, travel and day-to-day lives has had a knock-on effect, drastically changing consumer patterns and behaviors. And, of course, this has in turn affected manufacturers, dealers, financiers and many other related sectors. 

Without question, these are difficult times; yet, there is opportunity amidst the difficulty. Automotive industry players can leverage the crisis to make long-overdue changes and create new opportunities going forward.

Industry responses 

Automotive OEMs and lenders across all regions have learned hard lessons about their businesses in the face of this pandemic. Although there are commonalities in how firms responded, not all responses have been equal, and some have certainly been more effective than others. 

Some businesses, for instance, have chosen to ride out the storm, making the fewest changes possible; while others have seen these unprecedented times as a chance to move ahead and innovate. Below, we will highlight key opportunities uncovered by the pandemic and provide a few examples of companies already taking advantage of them. 

Transition to remote work

Like all industries, automotive has been impacted by the majority of its workforce going remote. The wider implication of this is the diminished demand for vehicles, with fewer people driving to and from the office. But for the people working within the automotive industry itself, it also spells opportunity. 

Pre-lockdown, there was a concern that working from home would result in a drop-off in productivity. However, research suggests that remote work has actually increased workers’ productivity and brought a list of other potential benefits.  

Breaking down silos

In some ways, remote work makes collaboration, innovation and knowledge transfer less straightforward; but in another way, it allows people the chance to communicate more openly. The adoption of remote work has required many organizations to reorganize processes, focus on staying connected and rely heavily on digital collaboration tools. Remote work presents companies with the chance to get more people on the same page and break down the silos that can form within larger organizations.

Going hybrid

The pandemic has forced the adoption of hybrid office models. This means working from home and the office part-time, possible hot-desking and scaling down office desks. If maintained post-pandemic, this approach will make a company more attractive to prospective employees (particularly younger ones), among other benefits.

One Sopra Banking client reported that only 10 percent of their workforce returned to the office post-lockdown, which is not expected to change until next year. In the future, they plan to adopt a hybrid model permanently. Following such a path would result in huge cost savings for businesses in most industries, including automotive, with some businesses predicting they will save as much as 30 percent in real-estate costs. 

Improving communication

Closely connected to the above point about silos, Covid-19 has also forced companies to adopt more digital communication tools. This has been and continues to be an opportunity for automotive firms to gain greater internal efficiency via video conferencing, messaging applications, project management tools, desktop integration and mobile capabilities. 

As is always the case, some businesses were more prepared than others, and the more traditional companies in the industry have been hit hardest (for a short period, at least, before slowly transitioning). However, the entire ecosystem has been affected by the pandemic, and it’s those who’ve been quickest to embrace remote work that will thrive in the future. 

Acceleration of digital 

Embracing e-commerce

Pre-Covid, car sales were among the few businesses that had resisted the gravitational pull of online buying. The general trend saw consumers browse vehicles online and then visit brick-and-mortar dealerships to make the final purchase. 

However, lockdowns and stay-at-home orders shifted customer behavior. Research shows that the share of people who undertake 50 percent or more of their total purchases online grew from 25 to 80 percent during the Covid-19 crisis.

Savvy industry players responded accordingly. Some retailers, for instance, added “Click & Collect” services, adapting to the expedited digitization of vehicle sales. And the opportunities hardly stop there. The coronavirus is a chance for the auto industry to continue ramping up its digital selling capabilities to match current conditions. 

Driving efficiency

Having more (and better) digital communication channels allows customers to remotely access pricing details, arrange financing and schedule home deliveries. Chatbots have a role to play here as well. The technology has improved in recent years to the point where it can handle increasingly complex interactions, allowing more to be done with fewer resources. 

Process automation has shown promise for all manner of tasks that are difficult to execute in a remote environment, i.e., onboarding new employees, contract reviews and ticket requests. For obvious reasons, the adoption of e-Signature products is rising, thus enabling more end-to-end car sales to be completed from home. This is an opportunity to make “touchless” experiences the industry norm, creating an easier and more user-friendly process for buyers. 

Upgrading underwriting processes

For lenders, a data-driven approach to new loans has become more critical than ever due to the current economic climate. Touchless underwriting processes have been introduced on a larger scale, meaning that more loan applications can be processed in less time without human intervention. Tools that employ AI and predictive analytics present a massive opportunity — one that promises the ability to segment borrowers above certain risk thresholds with greater accuracy and continue issuing credit responsibility. 

Open banking, and the greater access to data that it offers, also has the potential to significantly influence the auto loan underwriting process. This is true at the commercial and individual level. There are currently retail lending pilots, where, with permission, financiers can retrieve the transaction history of a potential borrower over the last three months. Trends like these will lay the foundation for more effective credit extension for years to come.

Challenging existing models 

The automotive industry has been ripe for disruption for many years. But the future is now, and survival during a global pandemic means implementing new processes and technologies that likely wouldn’t have been considered in normal times.  

The industry has long had technology solutions and resources on hand, and this is the moment to pull them all off the shelf. For example, the pandemic has seen the acceleration of digital auditing for floor plans, ultimately reducing the need for physical stock audits, saving plenty of resources for dealerships. But there are plenty more examples, which we’ll take a look at in this section. 

Adopting better tools

Covid-19 has highlighted the value of having the right tools and processes in place. One of our clients, a large wholesale lender who had previously opted not to align its business units by implementing the same software across the board, is a prime example. 

When pandemic struck, the wholesale side of the client’s business had to be nimble with dealer help packages. System adjustment requests were executed, and the business was able to adapt quickly. 

However, on the short-term rental and contract hire side of the business, existing manual processes proved costly and slow. Other manual processes had to be developed to adapt to pandemic-induced challenges. This underscores the benefit of simplifying complex business processes and adopting projects that align with scalable and adaptable applications.

Applying new HR methodology

The pandemic disrupted major work trends, and automotive HR leaders have had to scramble to adapt to digital vs. on-site management. According to research by Gartner, 16 percent of all employers are now using new technologies to manage their employees through methods such as virtual clocking in and out and tracking work computer usage. 

Many organizations are also expanding their use of contingent workers to maintain more workforce management flexibility during the pandemic. These are trends that can be built upon and are a chance for the auto industry to adopt an entirely new set of practices. 

Maximizing virtual interactions

As most auto shows and large conferences were canceled in 2020, some OEMs shifted new vehicle launches online. For instance, Hyundai unveiled its 2021 Elantra in Q2 via live stream. All told, their online video campaign was viewed around 800,000 times without anyone risking exposure. 

Such occurrences represent a radical mindset shift for an industry accustomed to shiny, in-person rollout events. And the application of this thinking extends beyond launches. We recently did definitions and conducted user acceptance testing remotely with clients. In the past, it was accepted that this required people to be on-site, but now there is every opportunity to question what is “mandatory” for in-person attendance and make the most of virtual capacities. 

Future threats

Despite the opportunities outlined above, there are still plenty of reasons to be concerned. The auto industry was already facing financial headwinds before the pandemic, and the impact of Covid-19 has only accelerated many of those worries.

In the short-term, companies in the automotive industry may need to batten down the hatches for a second wave or cold weather spike in Covid-19 cases. We’re already seeing countries around the world reintroducing measures that were previously lifted before the summer. 

As we continue into Q4, the underlying economic sentiment is one of deep uncertainty. Most sectors in most countries report minimal bad debt, but this leaves many unresolved questions. For instance, what will happen once government support runs out and a second wave hits consumer confidence? What will be the impact when more “ Zombie” companies start to emerge? What will be the impact of the economic downfall and rise of remote work (and, therefore, less demand for vehicles) on the automotive industry?

Cautious optimism 

No one can predict the long-term impact of Covid-19 on a macro-economic scale, but it’s not all doom and gloom, despite these uncertain times. There will always be opportunities for companies that prioritize their customers, control costs and innovate on their business models. 

Depending on how soon we’re able to overcome the Covid-19 virus, many industries, including automotive, may be able to bounce back with aplomb. Forty-five percent of people under 35, for instance, said they were considering buying a car in the next year, per Capgemini’s Q2 global survey. And the US presidential election, held in November, could stabilize the economic situation and boost consumer confidence in the world’s second-largest automotive market. Furthermore, some of the behaviors we’ve adopted during the pandemic, such as social distancing, may linger on for years to come, meaning people will be more keen to own and drive their own vehicles, rather than ridesharing or taking public transport. 

2020 has been a difficult year for the automotive industry, and the outlook for 2021 is still unclear. However, there are opportunities to be had for companies savvy enough to find them and willing to make changes. Those will be the businesses best prepared for the future, in the short and long term.