Although manufacturing facilities are starting to reopen, the automotive industry will feel the effects of the coronavirus (COVID-19) pandemic for months, if not years, to come. But can certain areas of the market pick up business where others fall? Phil Curry looks at the possible effects on the supply chain and the repair sectors.
As manufacturing plants reopen, supply chains are likely to suffer in the coming months. Social distancing will still be required, which will mean each station along a production line will likely allow a maximum of two people to work it. As lines will not get longer, each station will need to complete the same tasks with fewer people. A simple estimation suggests each station would now take twice as long to complete its work.
With the automotive industry relying on ‘just-in-time’ deliveries, and therefore having little or no storage space for components, orders to suppliers will likely slow, affecting the finances of those who produce OEM parts.
Over 90% of suppliers expect at least a 20% drop in revenue, up from 60% in March, according to a poll by the European Association of Automotive Suppliers (CLEPA). Some 35% expect a reduction of more than 30%. Profitability will take an even harder hit, with more than half of respondents now expecting to make a loss before taxes.
The prospect of a quick recovery worsened significantly as well. Three out of four businesses fear it will take more than a year to recuperate. One-third of respondents suggested a timeframe of two to three years.
The volatility of demand is considered the most critical issue for the automotive supply chain at the moment, with almost 90% of respondents ranking this as their number one concern.
Vehicle sales dropped dramatically in the UK during the last month, and with dealerships closed until at least the 1st June, except for ‘click and collect’ deliveries, May is not looking good for the new-car industry either.
The global economy is extremely fragile at present and businesses across all markets may be looking at job cuts to survive, much like they did during the 2008/2009 financial crisis. Suddenly the purchase of a new vehicle is not a priority for many consumers, who will instead rely on their old, trusty workhorses to get around. But these vehicles will still need servicing.
Therefore, we may see a scenario where service and repair will become more important to the automotive industry, especially in the next few months.
This is especially true as public transport succumbs to fears in the post-coronavirus world. With the inability to effectively maintain social distancing on buses and trains, many will look to drive to work, increasing the stress and strain on vehicles and therefore making them more likely to require servicing and repairs in the coming months.
‘With government advice stating that workers should avoid public transport when returning to work, the use of private cars is likely to rise more sharply than it already has over recent weeks, comments Mike Hawes, chief executive of the SMMT. ‘It is timely that the aftermarket can assure customers and colleagues that it is ready to re-open safely to ensure workers’ vehicles remain roadworthy. This is essential, not just for the sector, but for the restart of the wider UK economy.’
Although dealerships in Europe closed during the lockdown, workshops were allowed to remain open, as the repair sector was designated a key industry. It was not a requirement, however, and some smaller businesses took advantage of furlough schemes to protect themselves in a time of low demand, with many independents shutting their doors.
However, without the backing of major brands or franchises, the independent repair sector could suffer the most.
In the UK, the periodic technical inspection, known as the MOT, is an annual occurrence for vehicles aged three years and over. During March, the UK Government announced that it would defer these tests by six-months.
This was done to benefit drivers, who would otherwise have to leave their homes during lockdown to have a vehicle checked. However, it also creates various problems.
For a start, the country’s independent sector may suffer, especially those garages that rely on the MOT for most of their income. The Independent Garage Association (IGA) points out that 80% of the country’s 30 million yearly MOTs are carried out by the independent sector.
‘Next year will bring about a significant reduction of tests in March/April/May and with some businesses in this sector only conducting MOT tests, in these instances, the crisis will extend for many years ahead,’ the group said.
In addition, the current MOT failure rate is around 31%, which means that nearly 10 million vehicles do not meet the basic roadworthiness level of compliance. Any MOT extension will consequently increase the number of vehicles that are unroadworthy, even with reduced usage.
‘We understand that measures need to be put in place to fight the virus, and support these measures,’ comments Stuart James, IGA chief executive. ‘However, we do not agree with the six months extension of MOTs. We urge the government to show a degree of flexibility, as the repercussions for the independent sector will be severe.’
According to a survey conducted by Impression Communications in the UK, around 60% of independent garages in the country closed during the six weeks of lockdown.
The survey found the main reasons for garages closing were a significant drop in business caused by social distancing measures and the decision to extend the MOT from 30 March by six months. Other respondents noted practical reasons such as childcare and the inability to source parts as local motor factors had also closed.
The number of motor factors closing was smaller, currently 25%. Whether open or partially open, motor factors were running at 50% and below capacity. Interestingly, the motor factors that had initially closed had done so because of pressure from the public.
It is unlikely that new-car sales will recover to the same levels as in previous years, leaving many to rely on older models. This offers the repair and servicing market a boost, as these vehicles come in for part replacement and general checks. Therefore, the aftermarket may become one of the more robust areas in the automotive industry, and independent workshops, especially on the continent, may find work increasing as a result.
For the parts supply chain, however, things will be more difficult. While some will build for both OEMs and the aftermarket – Skoda, for example, kept its parts centre open during April to supply service locations – the sheer number of parts consumed by vehicle production cannot be offset by those sent to factors and workshops.
Often, production restarts at very low levels. This makes fixed costs rocket compared to turnover. The further outlook depends very much on demand for vehicles and, hence, for automotive components picking up substantially.