How can automakers tackle short-term shocks amid long-term disruption

The current need for many OEMs and their suppliers is to maximize and preserve liquidity now, while also developing a clear view of the market landscape when production comes fully back online. Only then can CEOs, CFOs and the board assess how the COVID-19 financial impact affects their efforts to adapt to long-term disruption.

Take near-term actions to address the continued downturn

Even before the current crisis, we have been working with OEMs and suppliers to improve liquidity and operations. The current situation has underscored the need to move from plans to practice. While companies have taken several immediate steps to improve liquidity and operations, they will need to find a sustainable approach to weathering the continuing downturn:

1. Continue near-term cost savings and cash management plans

The need to free up working capital, quickly ramp down or repurpose production while maintaining the flexibility to ramp up production just as quickly continues to be crucial.

• Assess available liquidity and tap it to extend the runway. In any crisis, whether due to rapid industry changes or an external shock such as COVID-19 that has little or no precedent, one of the first steps a manufacturer needs to take is to assess its available liquidity. Many CEOs and CFOs have taken steps to extend that liquidity runway. One typical step, reducing production, has already been forced on much of the industry. Other options can be suspending share repurchases and dividends, a step we have seen at least one major automaker take. Also consider whether capital invested in long-term projects such as autonomous driving needs to be rerouted in the short-term to meet current liquidity needs.

• Re-examine the cost structure and capital deployment. Even as government-imposed production restrictions are lifted, companies need to further examine their cost structure and labor flexibility. Will production that was online before the crisis still be needed to meet post-crisis demand? Typically, companies may have been able to work through some excess inventory when production was shutdown, freeing up capital. But with much of the world still staying home even as restrictions begin to lift, sales will remain sluggish. Consider whether more inventory needs to be worked down to free up capital. Communication with unions and European works councils may be more necessary than ever in order to ensure a workforce that can continue to flexibly meet demand needs now and going forward.

• Revamp the manufacturing footprint. This is a much longer-term solution, but the COVID-19 crisis adds to the complexity involved. In the past, changing the manufacturing footprint may have included examining both the number and location of manufacturing plants, and for suppliers, the specific parts that they manufacture. These can all still be levers for cost reductions. But the disruption of global supply chains caused by COVID-19 may also require reassessing the supply chain more holistically, seeking options in different parts of the world to prevent disruption caused by a crisis, or even a trade dispute. In some cases, consolidation may be the option. For example, we have worked with two OEMs that consolidated their ICE production operations. They have since also merged their automotive businesses into one legal entity.

Early warning is key

In the end, it is imperative for OEMs and larger suppliers to have as early a warning as possible that a supplier might be heading toward a distressed situation in order to anticipate a short-term disruption. This analysis can help an OEM or tier 1 supplier make decisions on issues such as from which suppliers to accept a price increase, what is the likelihood of success for a distressed supplier’s turnaround and which suppliers they can trust to be strategic suppliers in the long-term.

Also, while the predictive analytics are helpful, they will not catch everything; therefore, it is a must to put in place a rapid response team (generally with both internal and external resources available on call) to respond to the unforeseen cases when they arise. In fact, in a situation such as COVID-19, predictive analytics may not be as useful, as they usually track issues that have a longer lead time.

In a crisis, tracking supplier behavior, such as rapidly drawing down credit lines, and setting up open, structured dialogues with key suppliers to have a good oversight of their financial situation is essential.

Other steps to take:

• Stress test the business against assumptions for different futures and develop a playbook for dealing with those situations, including being proactive in communicating with stakeholders and understanding what rapid steps can be taken to improve liquidity
• Constantly conduct portfolio reviews and have a list of which assets can be quickly divested if needed to raise cash

The road to the future

When the current crisis abates, the industry will still need to take the steps needed to serve the mobility needs of the long-term future. As production ramps up, as mentioned, companies will still need to determine whether the scale of their operations is necessary to meet lower demand. Suppliers that only support gasoline engines are among those under the most pressure. In the coming weeks, we will follow up with steps to take for managing investments in new technologies, developing ecosystems through joint ventures and scenario planning for different futures.