Congress Conversations highlight pandemic trends in auto industry - Automotive News

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Although the COVID-19 pandemic prevented us from gathering for the 44th annual Automotive News World Congress in Detroit, we — like so many businesses — took things virtual instead with a series of weekly discussions that we dubbed Congress Conversations.

During these eight virtual town hall meetings this spring, experts from all facets of the auto industry weighed in with critical insights on and analysis of trends and issues stemming from this unprecedented pandemic. These virtual get-togethers were a great success, garnering more than 8,600 total plays online, including 6,000 live views.

Here we share some of the key trends and thought-provoking insights that emerged from these conversations. We hope you find these experts' perspectives helpful even another six months into the tumultuous "new normal," and that we see you in person the next time around.

In the wake of the pandemic, the American auto industry will grapple with a wave of consolidations, mergers and restructurings as financially strapped companies strive to share the burden of technology research and development costs, as well as resolve their own liquidity woes.

That was the assessment of Ray Telang, U.S. automotive leader at PwC, and John Casesa, a senior managing director at Guggenheim Partners and former group vice president of global strategy at Ford Motor Co.

While companies came into 2020 in better position financially than they were before the Great Recession of 2008 and 2009, overleveraged businesses will find it difficult to withstand the fiscal shock waves created by the pandemic.

"I would expect there will be bankruptcies, consolidations and restructurings," Casesa said. "Merger activity will get more intense … because smaller companies can't afford to invest in new technologies while maintaining their legacy technologies."

Moreover, cash shortfalls will force companies to be more selective about which technologies they keep developing. The upshot: more-specialized product portfolios, Telang predicts. "Investments in technology will be subject to more-rigorous ROI calculations," he said.

"Technologies without an immediate ROI will be deprioritized. We'll also see partners getting together that we haven't seen in the past in order to share the investment burden."

A survey of North American automotive suppliers conducted by the Automotive News Data Center during Congress Conversations appeared to validate Telang's predictions. More than three-fourths (78 percent) of respondents indicated they were likely adjusting budgets for capital-expenditure projects and R&D.

Companies will be faced with hard decisions, Casesa said. "On a macro level, big incumbents will have no choice but to reduce their overall spending levels."

The pandemic also likely will reverse a roughly 30-year trend toward global partnerships and supply chains in favor of regional and national affiliations.

"We're already seeing it," Telang said. "Supply chain disruptions … are causing companies to take a hard look at where they produce product and where their customers are and at becoming more regionally focused."

Despite the financial havoc wrought by COVID-19, now is not the time for automakers to reduce ad spending. But they also must be flexible enough to pivot quickly on marketing campaigns as the pandemic continues to affect consumers in unexpected ways, a panel of industry experts said.

A good example: the TV ads Ford Motor Co. created in a matter of days back in March. Instead of promoting a sales event or vehicles, the ads focused on a payment-relief program and reminded consumers about the historic role Ford played in natural disasters and wars. "The message is so very important right now," said Matt VanDyke, Ford's director of U.S. marketing. "Our rule of thumb is don't say anything unless you have something relevant to say."

Derek Baker, a partner in PwC's consumer-markets practice, said automakers should embrace opportunities to maintain long-term branding efforts. "Competitors are lowering their spends, and media rates are at an all-time low," he said. "This is a very opportunistic time to gain a greater share of voice for your brand."

Said Dean Evans, executive vice president of Cars.com: "Your share of voice needs to be a little ahead of your market share. You have to be out there providing a good message … but you have to know what channels to use."

On the other hand, a one-size-fits-all approach no longer works because customer experiences and COVID-19-related regulations can vary by state and region, said Kimberley Gardiner, then-chief marketing officer for Mitsubishi Motors North America. "So it's all about being flexible and adaptable," said Gardiner, who now is senior vice president of marketing at Volkswagen of America.

Another point: Automakers need to develop uniform online platforms for their dealerships.

"When each dealership has its own independent online marketing practices," said PwC's Baker, "it creates an uneven customer experience, which is detrimental to brand-building."

As dealerships adjust to a new retailing landscape shaped by COVID-19, optimism and uncertainty warily walk hand in hand. But one thing is certain: The vehicle retailing world has irrevocably changed as consumers now demand a more digitized buying process, experts say.

Pent-up consumer demand is fueling the optimism, with used-car sales leading the way. But uncertainty abounds about sales sustainability as that pent-up demand diminishes and regions experience different rates of recovery, said Doug Ekizian, managing director of the PwC consumer finance group. "This recovery will be much different than previous economic downturns," he predicts.

"What we're hearing consistently across the board is that this may be a 'W' recovery [not a 'V' or a 'U'], with everyone forecasting another dip," Ekizian said.

Ernie Garcia, CEO of Carvana, said his company is benefiting from its all-online sales approach. Consumers who were risk-averse to buying vehicles online now demand it.

"All of a sudden, consumers are contemplating things they wouldn't have before," Garcia said.

But just offering online sales platforms isn't good enough. Customers still want a high-quality experience across the board, including the service lane. As such, dealers must rethink how they can leverage digital technology to make consumers comfortable, said PwC's Ekizian.

Fundamental retail principles still matter, however. Basic "blocking and tackling" has never been more important than it is today, said Sandy Schwartz, then-CEO of Cox Automotive. "It's still extremely important to acquire the right cars at the right cost and sell them at the right price," Schwartz said. "This also is a really good time for companies to ask questions like, what have we been doing for a long time that maybe aren't the right things, and what opportunities exist that we haven't taken full advantage of?"

Automakers will face many challenges as they ramp up production, speakers said in the spring. Those include fixing potential supply chain disruptions, convincing reluctant employees that it's safe to go back to work and establishing new hygienic workplace protocols, said Mark Fields, a senior adviser at TPG Capital.

But the former CEO of Ford Motor Co. also remained bullish about the industry's long-term health. "There's no industry that knows how to adapt, survive and thrive like the auto industry," he said.

One critical success factor: proactive support for suppliers from the automakers. "If OEMs don't support their key suppliers," Fields said, "their plants are going down."

He also suggested that the federal government should offer incentives to consumers, perhaps early this fall, through something similar to the 2009 Cash for Clunkers program.

In terms of technology investments, automakers likely will favor electrified vehicles over automated vehicles. One possible exception: commercial automated vehicles, which will see greater demand because of consumers' increasing preference for home-delivered goods, Fields said.

"It's an undiscussed secret in the industry right now that there's no business model that shows this (automated consumer vehicle) will make money and earn, at a minimum, its cost of capital," he said.

Another possible trend: Demand for cars may rise as consumers avoid ride-sharing services and mass transit, which now are viewed as unhygienic. "Vehicles now are almost perceived as a form of PPE" (personal protective equipment), Fields said.

What will separate the winners from losers among the automakers? Flexibility, innovation and leadership — and a disdain for red tape.

"In this scenario, you have to be very wary of bureaucracy because time is so important," Fields said.

The liquidity of automotive suppliers was a top concern as automakers ratcheted up vehicle production. But beyond that, uncertainty was the only certainty as suppliers wrestled with challenges ranging from establishing safe workplace guidelines to potential supply chain disruptions.

What topped the list of concerns about returning to business? Respondents to the April survey conducted by the Automotive News Data Center cite managing automakers' uncertain production schedules (57 percent), followed by implementing operational changes in response to a "new normal" (52 percent) and flexing operations in response to fluctuating recovery scenarios (51 percent).

Liquidity was more a future concern last spring than a current worry. Because suppliers furloughed employees and haven't been buying materials, many were "flush with liquidity" because they eliminated roughly 75 percent of their expenses, said Dietmar Ostermann, senior partner and U.S. automotive advisory leader at PwC. "The big question is how much liquidity is required to start up production," he said.

Agreeing with that assessment was Wilm Uhlenbecker, CEO of Brose North America. "There will be liquidity problems going forward, especially in July and August with more cash outflow to buy parts," he said. "Fixed costs versus low volume clearly is a concern."

In mid-May, a survey by the Original Equipment Suppliers Association found that 20 percent of respondents had less than eight weeks of liquidity left, said Julie Fream, the group's CEO.

On the positive side, the fiscal crisis could spur industry efficiencies, said Bo Andersson, CEO of Yazaki North & Central America. "I say to our people at Yazaki, if customers want us to be more competitive than ever, we need to sharpen our knives and make sure that we're competitive in quality and in productivity in our supply base," he said.

Fream agreed, noting that despite the tragedy, the pandemic is accelerating some needed industrywide changes. "It has put us on a much faster pathway to get there," she said.

Said Brose's Uhlenbecker, "This situation has opened our eyes even further about accelerating innovations and efficiencies to become more competitive in the future."

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