In the last 12 months, the automotive industry has experienced a downturn (severely exacerbated by COVID-19), new regulations to phase out internal combustion engines, and the disruption of global trade flows driven by an alarming rise in protectionism. Suppliers have to cope with falling demand and stretched balance sheets while navigating operational and logistical challenges that include work force availability and price increases. At the same time, suppliers are adjusting to a future likely to be dominated by electric vehicles and new business models. Only by successfully navigating both time horizons will suppliers be able to thrive in a rapidly changing industry.
Dealing with demand shock
According to Society of Motor Manufacturers and Traders (SMMT) data, UK car production fell 29%1 in 2020 compared with the previous year. Commercial vehicle production was also severely impacted, down 15%2 over the same timeframe.
This was driven by both the economic fallout from the pandemic and the physical problems that lockdowns and border closures posed to automotive production. The EY Mobility Consumer Index looks in more detail at how consumer behaviours are changing in response to the pandemic.
As a result, thousands of automotive suppliers – from individual component manufacturers to system integrators and technology leaders – are having to cope with lower production volumes. While underutilisation is a problem for all manufacturing businesses, it is particularly acute for automotive suppliers, where low margins and interconnectedness within the supply chain mean that falling demand creates an existential problem for many companies. These suppliers have to quickly enhance liquidity, recapitalise and, where possible, secure OEM (original equipment manufacturer) support.
While OEMs may offer support, this is likely to be selective. Faced with falling demand, OEMs themselves are already having to take bold action, which ranges from simplifying models to closing plants. More cooperation is also being considered around certain vehicle segments, platforms and powertrains.
This is not a case of riding out the storm until volumes pick back up. Our forecasts show that demand for traditional combustion engine vehicles is unlikely to reach pre-crisis levels (although the used car demand, and therefore aftermarket, remains strong). So, while firefighting current challenges, suppliers must simultaneously plan for a different future.
Brexit adds to operational challenges
One of the headlines from the Brexit deal agreed on Christmas Eve was that UK-EU trade will continue to be free of tariffs or quotas – but there is some important small print. Trade in auto supplies is only tariff free if parts contain enough content from either UK or EU factories. For components with significant input outside the EU or UK, as is regularly the case in a truly global industry, tariffs will apply. Even where they do not apply, more paperwork and border checks are likely to increase cost and threaten timelines, adding further friction to supply chains.
Brexit, however, is not the only pressure on global automotive supply chains. Many have commented on the impact of the pandemic on just-in-time supply models. As COVID-19 hit production or halted cross-border shipments, many suppliers experienced or anticipated shortages of vital components, with semiconductors a key area of disruption and they are now also facing sharp price rises and disruption in the supply of critical raw materials such as steel. In response many increased their inventories, adding cost and inefficiency to supply chains and increasing pressure on cashflow.
Looking further ahead, these pressures on global supply chains could see OEMs increasingly favour local suppliers, creating new opportunities for those positioned to benefit.
Long-term impact of electrification and new business models
Perhaps the most important trend of the year is the speed and scale of electrification. While new petrol and diesel vehicle registrations fell 29%3 and 55%4 respectively in 2020, it was a bumper year for battery and plug-in hybrid electric cars, which together accounted for more than 1 in 10 registrations – up from around 1 in 30 in 2019.5
This momentum is likely to continue at pace as sustainability becomes increasingly mainstream. The UK government’s Green Recovery 10-point plan, published in November 2020, signalled a rapid acceleration in the production of electric vehicles with its announcement of a phasing out of new fossil fuel cars and vans by 2030.6
The challenge for suppliers is clear: electric vehicles require different parts and fewer of them. This impacts not only supply to new vehicle production, but also affects aftersales, which has historically provided a profitable channel for automotive suppliers. At the same time, the industry is expecting a shift away from private car ownership. This will see the acceleration of a number of different business models, from subscription and car sharing to ride hailing. Rising demand for ‘last-mile delivery’ is creating new opportunities for small vans. This combination of new technologies, new business models and new consumer behaviours means there will be new OEM entrants, both globally (major tech companies) and locally (for electric commercial vehicles).
Suppliers must plan for a very different automotive landscape over the next 10 years. There will be opportunities, but only for those willing and able to explore them. By pivoting towards new technologies, suppliers can stake their claim to be part of the future value chain.
Taking action – the need for a brave approach
The need for action is clear, but with suppliers typically facing multiple and pressing issues, it can sometimes be hard to know where to start. Suppliers can begin by asking these crucial questions.
- Do you have a convincing business plan to unlock the short-term finance you need?
- Do you have clear line of sight to your customers’ strategies and where you fit into them?
- By making decisions to address your short-term operational and financial demands, could you be missing out on future growth opportunities?
- Have you got the capacity and insight needed to correctly identify where you want to play in the future and how you are going to win?
- How do you turn the threat of the coming months into an opportunity to reposition your business for the future?
- How can you fund a pivot towards new technologies during a time of reduced cashflows and liquidity?
- Are you making the most of available external support such as the UK government's new super deduction?
The crucial point here is that, while pressing operational and cash pressures must be dealt with immediately, suppliers must do so with an eye to the future. Making the wrong decision now – for example, to reduce costs by simplifying product lines – could potentially position your business poorly for the future.
Even suppliers in purely short-term survival mode may find themselves forced to confront longer-term issues. For example, a request for additional credit to maintain liquidity is unlikely to be granted without a convincing business plan that demonstrates the supplier’s ability to survive beyond the demand shocks caused by COVID-19. Similarly, an OEM may be more willing to consider improved pricing or payment terms for a supplier who can demonstrate their future relevance. Finding the time, expertise and perspective to consider all these factors together can be difficult, yet a failure to do so can impact short-term survival.
EY are helping suppliers and OEMs navigate these rocky roads. We are supporting suppliers with liquidity, rapid turnaround and their business planning for electrification. We are helping OEMs react quickly and make the right interventions, moving early to stop greater problems from emerging later. Find out how our advanced manufacturing & mobility team can help you reshape your results.
