COVID-19: Impact On The Automotive Industry Accenture

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Impact on theAutomotive Industry:Navigating the Human andBusiness Impact of COVID-19April 2020COVID-19: What to do Now, What to do NextNOWNEXT

01Covid-1902The Disrupted Automotive Value Chain03Rapid Response and Key ImperativesExternal shock: One of the first pandemics of its kind that is forcing the automotiveindustry to re-think its businessWhat is the impact of Covid-19 on the automotive value chainHow to address current disruptions and prepare for the ‘new normal’

Disclaimer: Facts and figures as of March, 24th 2020Global economies areheavily dependent on theautomotive industryIn many respects, the automotive industry is essential for theglobal economy and the resulting prosperity:Links to other industries: The automotive industry is a criticalcomponent of economic growth with extensive interconnectionsto upstream (e.g. steel, chemicals, textiles) and downstream industries(e.g. repair, mobility services).Employment in the automotive industry: With nearly 14 million peopleemployed in Europe and 8 million in the US, as well as approximately5 million in China, the figures highlight the importance of the sector.Economy: The turnover earned by the automotive industry exceeds7% of EU GDP, 3-3.5% of the overall GDP in the US and 10% in China.Although it is currently a difficult time, the OEMs that are able tomobilize their COVID-19 response and take swift actions will be in abetter position post-event and more resilient going forward.Sources: Accenture Research analysis based on European Automobile Manufacturers Association, Stats.Gov.CnhCopyright 2020 Accenture All rights reserved.3

The epidemic places evenmore pressure on theautomotive industryThe automotive industry is disrupted by the four megatrendsconnected, autonomous, electric and shared driving, causing anunprecedented technology and business model transformation.Amid this transformation, the COVID-19 outbreak is puttingadditional stress on the industry.After initial supply and manufacturing disruptions, the industry is nowexperiencing a demand shock with uncertain recovery timeline due toshelter-in-place regulations. With limited room to cut fixed costs, someOEMs have low liquidity to power through a long period of missingrevenues. Decreases in market capitalization will likely accelerate industryconsolidation and without securing additional funding, some players riskgoing out of business. Changes in customer behavior, such as differentmobility preferences and online shopping expectations, might remainafter the crisis.To deal with the disruption, businesses need to execute actions overthree timelines:a) A fast response to navigate the emerging situation with a focus onprotecting peopleb) A reset of current business activities to adapt to new financial realitiesc) A renewal of strategic plans to emerge stronger after the crisisCopyright 2020 Accenture All rights reserved.4

Disclaimer: Facts and figures as of March, 19th 2020What automotive experts are sayingPROFIT DILEMMASUPPLY DILEMMASALES DILEMMADEMAND DILEMMA“The Western Europeanautomobile market will needabout 10 years to reach thesize of 2019 again.”“Even a disruption of one part[of the supply chain] coulddepress some U.S. autoproduction. We need all theparts to make a car, we can’t doit with 99.9%”“The global auto industry isexpected to witness anunprecedented and almost instantstalling of demand in 2020, withglobal auto sales forecast toplummet more than 12% from 2019,to 78.8 million units, [ ].”“The real problem is on the demandside, people are not buying carsnow, and sales volumes areexpected to be very bad in March,with a real impact on automakers’earnings”Prof.Ferdinand DudenhoefferDirector of Germany’s Centerfor Automotive ResearchKristin DziczekVice President at theCenter for AutomotiveResearchIHS Markit AnalysisMarco OpipariFidentiis AutomotiveResearch AnalystCopyright 2020 Accenture All rights reserved.5

01Covid-1902The Disrupted Automotive Value Chain03Rapid Response and Key ImperativesExternal shock: One of the first pandemics of its kind that is forcing the automotiveindustry to re-think its businessWhat is the impact of Covid-19 on the automotive value chainHow to address current disruptions and prepare for the ‘new normal’

Along the whole automotive value chain:Four major challenges amid the COVID-19 ANCINGStarting in China, suppliersaround the globe placedproduction lines in quarantineor shut them down completely.Also, legal and traderestrictions, such as closedborders, increased theshortage of required parts andlimited distribution of supplies.MANUFACTURING1. Limited Supply ofVehicle PartsSALESAFTERSALESFINANCEHRCORE IT4. Drop in NewVehicle SalesPolitically enforced measuresto contain the virus, such asimplementing curfews, closingfactories, offices, dealershipsand the resulting dismissals ofshort-time workers, as well asthe fear of a recession, arelikely to lead to a decrease insales numbers.2. Shut down of Manufacturing3. Declining Working Capital/ LiquidityA limited parts supply and a just-in-time production strategy,coupled with quarantine measures and a reduced workforce,lead OEMs to shut down their production. This is enhanced bythe need to secure liquidity and reduce overproduction dueto the decrease in sales.A decline in cash inflow resulted from the drop in demand whileshort-term liabilities and salaries still need to be paid. Cash reservesare likely to be exhausted within a few months.COVID-19Copyright 2020 Accenture All rights reserved.

Disclaimer: Facts and figures as of March, 24th 2020Supply: “Just-in-Time” production, global networks andlean inventory make the supply chain vulnerable to disruptionWHAT IS HAPPENINGWHAT’S NEXTGlobal Network: Chinese exports of vehicle parts andaccessories[in USD billion] The risk to supply chains has beencompounded as OEMs have created globalnetworks to leverage low-cost labor whilestriving for zero inventory to minimizeworking capital141211.7108US is most exposedto China’s nySouth KoreaOES and LSP Examples [non-exhaustive] Leading Freight Forwarder: Delays with shipmentsdue to increased health and safety measures atvarious borders (both land and sea). Major Auto Components and Tire Suppliers: Mostof the production sites have stopped operations dueto lacking demand from OEMs and workforceprotection.Copyright 2020 Accenture All rights reserved.General Observations: Global auto production is stronglydepending on China (see graph on the left).Supply shortage is affecting assembly ofall OEMs in NA, Europa and Asia In China, almost 2/3 of auto productionwas directly affected by the shutdownwith a large impact on their suppliers aswell2 Hubei province accounts for 9% ofChinese auto production, disruptingsupply chains until operations recover With factories operating at a fraction ofcapacity, and trucks not delivering, oceancarriers cancelled many routes Effects boosted by legal and traderestrictions such as closed borders Recovery of the auto supplychain will take time, even with amulti-supplier scenario anddependence on various factors,such as regulations, availabilityof workforce and infrastructure,timely certification for safetyparts, etc. Eventual recovery should leadto a rebound in imports andexports. However, the re-startwill be complex, cost-intensiveand will take time due to theneed to synchronize productionacross the supply chain, i.e. dueto just-in-time production. The trend to decrease overdependence on one countrywill become more prominent.OEMs learning from the crisisenforce dual sourcingstrategies. Also flexibility ofproduction will be increasedto shift the production fromone plant to another.Sources: Accenture Research, Reuters, CNN, Automotive Logistics, Jetro; 1) ShipMatrix, March 16th2) IHS Markit us-impact-on-automotive-industry.html)8

Disclaimer: Facts and figures as of March, 24th 2020Manufacturing: While NA & European OEMs are stoppingproduction, operations in China are starting againWHAT IS HAPPENING1 [non-exhaustive]WHAT IS NEXTSituation in North AmericaSituation in China OEMs stopped their production across NA Chinese plants, after suffering a major shutdown for a couple of weeks, start up as the restof the world shuts down Most leading OEMs restarted almost all of theirproduction plants An American electric vehiclecompany was forced to shut down theirfactory under a shelter-in-place order The ‘Detroit 3’ automakers (and otherOEMs) followed suit and also shutdown their production in the USA,Canada and MexicoSituation in Europe All OEMs have shut down the majority of theirEuropean production: Leading German manufacturers shut down themajority of their production in Europe for at leasttwo weeks with other OEMs closing for longer Other multinational automakers shut down themajority of their plants through the end of March An American multinational automakerannounced a temporary closure of all plants incontinental Europe The majority of OEMs announced a short-timework, overtime reduction, etc. for selectedadministrative departmentsCopyright 2020 Accenture All rights reserved. OEMs across the globe aresupporting local authoritiesby helping to produce urgentlyrequired medical equipment(e.g. ventilators, face masks). The overall impact of productionshutdowns due to collapsingdemand, challenges with partssupply, and workers’ safety willhave a major economic impactin the short to medium run:global automotive production isestimated to decline by 16% in20202. Shut down of production facilitiesin Europe is expected to affect 14million jobs (direct and indirect). China regulators are exploringrelaxing of some emissionsstandards to provide relief forautomakers battling anunprecedented slump.1) Accenture Research; 2) RBC Capital Markets, March 16; European Automobile Manufacturers Association9

Disclaimer: Facts and figures as of March, 24th 2020Working Capital & Liquidity: A median cash burn rate of 2 months indicates short-term liquidity due to shutdownsGROSS CASH BURN RATE [months, 2019]WHAT IS HAPPENING &WHAT IS HAPPENING NEXT3. 1.61.2Copyright 2020 Accenture All rights reserved.OEM 11OEM 10OEM 9OEM 8OEM 7OEM 6OEM 5OEM 4OEM 3OEM 2OEM 10.7 Cash burn rate in the industry is currently less than 2 months. ManyOEMs will likely soon face liquidity issues as operating cash flowdiminishes during the crisis. Therefore,OEMs are tightly managing cash flow and reviewing allnon-existential expenses to weather the storm, e.g. hiring freezes,delay of capex plans, etc. Moreover, several OEMs are bargaining higher credit lines with theirbanks to survive the crisis. In addition, government aids might be necessary to preventbankruptcies and job losses, including funding for short-term work,short-term financing, tax deferrals, etc. Dealers and suppliers are similarly vulnerable to a sustained periodof missing operating cash flows, e.g. due to a forced shutdown ofdealer sales operations in many countries. Thus, OEMs should takethe financial health of their key partners into account, e.g. extensionof dealer payment terms, suspension of dealer targets, etc.Cash Burn Rate (cash & cash equivalents) / monthly operating expenses (excluding depreciation). A company's burn rate is also used as a measuringstick for its runway, the amount of time the company has before it runs out of money; Source: Bloomberg; Accenture10

Disclaimer: Facts and figures as of March, 24th 2020Vehicle Sales: February sales dropped by almost 20%compared to 2019. More than 2 yrs. needed for global recoveryLight Vehicle Sales Feb 2019 vs. Feb 2020 [in k uary 2019February 2020 8,3% Overall, global automotive light vehicle (LV) sales have dropped by 20% (YoY) from 6.335K in February 2019 to 5.077k in February 2020.-6,5% China, the first country hit by the virus,experienced an enormousdrop in sales with 80% in February [followed by South Korea, Japan & Western-10,6% 4,5%-17,9%ChinaJapanSouthKorea 2,9%WesternEuropeEasternEuropeWhat is Happening & What is NextUSACanada-4,5%Brazil &ArgentinaLight Vehicle Sales Forecast 2020-2024 [in million units]395Europe with sales dropped in all four major markets:Germany, France, Italy & Spain]. Car sales in the USA & Canada, as well as Eastern Europe, wereresilient until February due to the positive market outlook before theoutbreak. With rising COVID-19 cases and an increasing number of quarantinemeasures, demand is expected to (further) decline in March & April inall parts of Europe and North America. In many European countries, dealers have already stopped vehiclesales. Service is still open but also facing declining demand.90 In China 90% of franchised new-car dealerships have reopened, butshowroom traffic remains at 53% of normal levels2858075702019Baseline (45%)202020212022Extended Lockdown (40%)Copyright 2020 Accenture All rights reserved.20232024Lockdown w/ Ineffective Stimulus (15%) Current developments are unlikely to change in the near future: Sales in China are likely to drop by more than 10% in 20203 Sales in the USA are estimated to decline by 15% in 20203 Sales in Western Europe are expected to decline by 14% in 202031) MarkLines Report, March 16th; 2) Automotive News China, March 18th, 3) IHS Markit Report, April 1st11

01Covid-1902The Disrupted Automotive Value Chain03Rapid Response and Key ImperativesExternal shock: One of the first pandemics of its kind that is forcing the automotiveindustry to re-think its businessWhat is the impact of Covid-19 on the automotive value chainHow to address current disruptions and prepare for the ‘new normal’

Disclaimer: Facts and figures as of March, 24th 2020The direction of the industry isexpected to remain unchanged –but there is uncertainty regardingthe timeframeFirst, small signals of a rebound in the Chinese economy:China’s government is talking up the prospects for a rapid economic rebound. At themoment, one can already see that there are early first signs of a recovery in the Chineseeconomy, measured by the movement of people and goods, production, etc. Whetherthe recovery of the Chinese economy is sustainable cannot be said at this point in time.Multiple possible rebound scenarios across the globe:There are various scenarios for the recovery of individuals and the global economy. Ingeneral, three scenarios could be observed from previous crises (e.g. “Sharp V”triggered by SARS in 2003; “Short U” caused by the early recession in 1980; “Deep U”caused by financial crisis in 2008). The scenario will be driven by the combination ofthe resolution and containment of the medical emergency, the resulting consumerconfidence, as well as the effects on the overall economy influenced by publicintervention.Slower adoption of the megatrends:The direction of the automotive industry towards the four major megatrends(connected, autonomous, shared and electric driving) is expected to remain unchangedas trends will continue to drive the industry evolution going forward. However, thespeed of adoption might change due to the emergency.Considerable uncertainty regarding the timeframe:As the timeframe cannot be predicted right now, industry players must be ready for allscenarios. Therefore, they must develop the capabilities to quickly identify the signalsand direction – how to manage the ongoing crisis, how to reset ways of working andhow to renew for the “new normal”.

To holistically react to the crisis, OEMs should align theirstrategic thinking along three time horizonsNOW RESPONDNEXT RESETRENEWHow OEMs should respond tothe ongoing crisisHow OEMs should reset theirways of workingHow OEMs should renew forthe ‘new normal’ Implement measures for peoplesafety Manage and mitigate risksacross all functional areas Create transparency to enableeffective decision-making Identify trapped value,especially in operating cost, toprevent a liquidity crunch Create cost-efficientoperational robustness by redesigning towards intelligentoperations, with digitallyenabled people and backoffice processes Enable product portfolio shiftsthrough flexible supply chains Scan market for inorganicgrowth opportunities Establish digital workplacetaskforce to ensure effectivecollaboration Reprioritize investmentplanning and strategicroadmapsCopyright 2020 Accenture All rights reserved.14

OEMs should develop concrete measures to tackledisruptions now, strengthen operations to increasefuture resilience and prepare for the ‘new normal’Cross-functionalEnablerNOW RESPONDNEXT RESETTHEN RENEWHow OEMs should respond to theongoing crisisHow OEMs should reset theirways of workingHow OEMs should renewfor the ‘new normal’Establish a business control tower to coordinate and enable cross-functional, quick and pragmatic responsesMobilize a control tower to orchestrate the supply chain operationsSupply SideEstablish risk mitigation strategiesRe-design your network to increase resilienceIncrease safety measures during re-startPrepare shock protocols to accelerate the shift when ‘emergency mode’ is neededManufacturingEstablish IIoT concepts in manufacturingEstablish working capital crisis mode to increase cash burn rateWorking Capital& LiquidityEstablish regular liquidity stress testsInfuse treasury management with AIKeep engaging with customersVehicle SalesSetup remote processes to continue operationsProfessionalize the online-to-offline customer journey, including pickup and deliveryImplement a direct sales modelCopyright 2020 Accenture All rights reserved.15

Cross-functional: A business control towerenables quick and pragmatic reactions to arapidly evolving situation Cross-functionalHRtop management crisis response team coordinatedby integration team; satellites in each region Agile working modeINTEGRATIONINTEGRATIONTEAMTEAMwith daily informal C-Level updates instead oflengthy reporting cyclesFINANCE Data-drivendecision taking based on daily updated health,macro-economic, industry and company data fromdifferent regions Technology-enabledSALES& MARKETINGdecision making and reporting to enable quickeractions, e.g. with AI Forward-lookingSUPPLY CHAIN &OPERATIONSscenario planning and forecasting to prepare fordifferent durations and impacts of the crisis andhave a strategy at hand for the recovery andbusiness restart16

Supply SideRecommendations: Now & NextNOW RESPONDNEXT – RESET & RENEWWhat can be done to stabilize the supply chain?What can be done to ramp upoperations and what adjustmentsneed to be made post-crisis? Mobilize a control tower to orchestrate the response: Establish an operating model forresponses related to supply chain interventions. Identify stakeholders, design governance,establish communication channels, and define processes to identify, prioritize and manageinterventions. Appoint a single point of responsibility for owning the response plan. Onceestablished, the center coordinates responses—from definition and alignment to communication. Sense the risk and create E2E transparency: Anticipate a disruption event with the help ofbig data, intelligent systems and connected ecosystems. Identify the potential exposure ofeach component to a risk all the way up the supply chain and prioritize risks accordingly. Analyze the risks: Evaluate the risk impact, both financially and operationally, modelscenarios and evaluate alternatives. Configure the risk response: Develop a detailed action plan for components and supplierswith the greatest impact and decide which response actions to take, by whom and with whattrade-offs / considerations. An effective plan uses a blend of levers, including shift sourcingto other geographies, identify alternative suppliers, ad hoc negotiations and safety stock. Operate with agility: Execute the response, monitor the results of ex

01 Covid-19 External shock: One of the first pandemics of its kind that is forcing the automotive industry to re-think its business 02 The Disrupted Automotive Value Chain What is the impact of Covid-19 on the automotive value chain 03 Rapid Response and Key Imperatives How to address current disruptions and prepare for the ‘new normal’

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