Podcast transcript: What renewed demand means for the mobility sector

11 min approx | 1 April 2021

Announcer

Welcome to the EY Advanced Manufacturing and Mobility Business Minute podcast series, where EY practitioners explore the critical business issues impacting our industry today.

Moderator

With us, for this episode of the Mobility Quarterly Update, is Akshi Goel, EY Global Analyst for our Mobility sector.

By way of a quick explanation, the Quarterly Update is a review of the top 10 themes discussed by leaders of mobility sector companies during public earnings calls. Included in our analysis are sector companies from passenger vehicles, commercial vehicles, airlines, logistics, automotive suppliers and retailers.

For this discussion, we’ll briefly recap third quarter observations, and then delve into what transpired in the fourth quarter of the year and wrap up with what lies ahead as we start to analyze first quarter 2021 earnings calls.

So, without further ado, welcome, Akshi, and thanks for joining us today.

Akshi Goel

Thank you, Bhavini, for having me.

Moderator

Let’s dive in with our first question. As organizations continue to recover from the pandemic’s effects what are you seeing as a response to trends from the third quarter? 

Goel

Bhavini, so by the end of the third quarter, we were witnessing demand recovery in most of the key markets and several mobility players were resuming investments to cater to the rising demand. However, while some companies were reporting that they were emerging leaner and stronger on the back of cost reduction initiatives, many were facing declining margins and in fact, select companies refused to provide outlook updates. Also, we were witnessing signs of impending supply chain issues.

Observing these, we cautioned on supply chain disruptions and financial stability issues. And it is not surprising, this is what we observed during fourth-quarter calls as a medium- to long-term impact on supply chain and geopolitical environment was beginning to crystalize. Recovery across markets intensified the shortage issues in lower tiers of the supply chain, such as the semiconductor, steel and precious metals industries, and seat foam shortage among others. Due to these shortages, OEMs are reporting temporary production halts and plant shutdowns, and in fact, it could continue to reflect on production for most of the 2021.

Moderator

Thanks, Akshi, that was a great summary of observations from third quarter. So, can you share with us what fourth-quarter earnings calls revealed?

Goel

Sure, Bhavini.

Fourth-quarter earnings calls revealed that mobility companies prepared for uncertainty despite demand resumption as sources of disruption continued to increase.

The mobility sector continues to witness recovery in consumer demand across sub-sectors as the pandemic acted as a catalyst for the shift in consumption patterns toward e-commerce and sustainability.

And so far, agility in decision-making, resiliency in operations, accelerated digitization and leaner cost structures have been crucial in managing the challenges laid out by the pandemic. However, the medium- to long-term implication of COVID-19 is just beginning to crystalize. The dynamic policy environment globally covering sustainability, localization, trade policies, etc., is increasing operational volatility for companies. While demand recovery across sectors could further intensify raw material shortages.

That’s why mobility companies need to prepare for rising uncertainty as the industry has started witnessing newer challenges and associated geopolitical risks.

Moderator

Akshi, did specific themes come to light that you can expand on?

Goel

Sure, Bhavini, as we spoke about increasing volatility in end markets, it is no real surprise that developments in end markets became the top theme. We also heard some important updates on competitive positioning and business reorganization.

So, let’s address each one. 

Developments in end markets moved up from quarter three to become the top theme for the fourth quarter in 2020. Automotive peers are witnessing a strong recovery in consumer demand across sub sectors; however, the impact of lockdowns and manufacturing disruption continue to reflect on performance, while shortages of semiconductors and raw materials could impact production significantly in 2021. In the transportation sector, while cargo demand continues to be a bright spot for airlines, logistics peers are witnessing sustained growth arising from e-commerce activity.

If we talk about competitive positioning, it continues to be an important theme and retained its number 2 ranking from the previous quarter. So, achieving the optimum product price and customer mix remains a top priority with automakers. Original equipment manufacturers (OEMs) have set up a strong product pipeline with a focus on sustainability and connected vehicles. Automotive suppliers are now launching new products and services that were delayed due to COVID-19. And If we talk about airlines, then, they have started diversifying their international network, while logistics peers continue to add new facilities and aircraft to their overall fleet.

The third important theme which emerged in the fourth quarter report is business reorganization. Several peers are reporting performance improvements due to leaner cost structure and rationalization of product portfolios toward high margin segments. And airlines are aligning costs with capacity and they’re preserving their flexibility to respond to consumer demand, while logistics peers are undertaking cost-reduction programs and divesting low-return business divisions.

Moderator

Akshi, those were great insights. We’ve touched on these top three themes from the fourth quarter. For our audience, can you share additional insights on other observations that may be of interest?

Goel

Sure, Bhavini.

Sustainability initiatives have increased significantly over the last couple of quarters. And what we’re seeing is that sustainability in an environmental, social and financial sense, is now a management imperative. So, we heard several automakers, as well as suppliers, they have announced their intention to transition to a net zero carbon future. And in fact, most companies have started including sustainability in their overall operations as a basis to optimize shareholder return. Also, we are witnessing that consumer demand for sustainable products is increasing as they are now recognizing long-term cost benefits, while it was initially supported by governments through incentives or tax breaks.

The second theme which was also talked about is product design and innovation. So, we are witnessing an increase in activity toward design and innovation. Passenger vehicle automakers are accelerating their transition to electrification by not only launching new models and setting electrification targets, but they are also introducing the creation of a separate business unit to address the specific needs of their Electric Vehicle business. For the commercial vehicle industry, they are also experiencing a shift toward electric and hydrogen-fueled vehicles with a continued focus on decarbonization and they are expanding alternative fuel offering on the back of government support and R&D investments.

So, we saw that overall, there were several mobility companies that are deploying digital platforms and expanding connected solutions to enable end-to-end fleet management solutions. And these solutions are widely adopted by OEMs, suppliers and dealer groups as well.

If you talk about logistics companies, they are tracking goods in real-time and digitizing back-office operations to improve productivity, and in fact, select peers are also investing in autonomous robots to improve warehouse efficiency.

Moderator

Those were great insights, Akshi, thanks for sharing with us. Can you reveal any initial observations that are surfacing for the upcoming first quarter of 2021? And of course, we look forward to a deeper dive once Q1 analysis is completed.

Goel

Sure, Bhavini. 

So, we are seeing that the increasing intensity of policy interventions in several geographies at multiple fronts including sustainability, supply chain localization and in fact, faster adoption of emission-free drivetrains.

The Biden Administration has vowed to establish ambitious fuel economy standards to eliminate greenhouse gas emissions by 2050. And if we do the calculation backward, most of the environmentalists say that the only way to meet that goal is to mandate all new cars to be emissions-free by 2035. Although finalizing these rules could take up to two years, we believe that the combination of the regulatory policies that have been applied to the industry and the accelerated pace of change resulting from the COVID-19 pandemic has really brought us to the edge of a potential tipping point in green mobility adoption. Now, It will be interesting to note that what we hear in the next quarter on the electrification front.

Also, I think supply chain disruption issue is a prominent cause of concern for the automotive industry as this ongoing issue is not expected to be resolved before the second half of 2021 and this could significantly impact the production rate in a recovering market.

If we talk about transportation companies, we believe that e-commerce will continue to support revenue growth attributed by an increase in e-commerce activity across sectors, especially the pharma and the health care sectors. For the airlines industry, corporate travel will remain subdued, while leisure travel could witness recovery. And cargo segments will continue to witness strong growth with increased vaccine delivery and rising e-commerce demand.

Now, as vaccination distributions have started in major countries, we really look forward to hearing what companies are witnessing in terms of changing consumer behavior and demand uptake. 

Moderator

Thank you, Akshi, for your valuable insights, and we hope you’ll come back in a few weeks’ time and share with our audience key themes and trends that emerged from Q1 2021 analysis. 

Goel

My pleasure, Bhavini. I always enjoy these podcasts and look forward to our next session!

Announcer

Thanks for listening to today’s EY Advanced Manufacturing and Mobility Business Minute podcast. We hope you found it engaging and informative. To listen to other Business Minute podcasts, you can find them at ey.com\ammpodcasts.