COVID-19 and the automotive industry

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Practical steps for responding to the coronavirus crisis

The coronavirus (COVID-19) outbreak is causing widespread concern and economic hardship for consumers, businesses and communities across the globe.

As the pandemic disrupts business as usual and throws the economic outlook into uncertainty, the automotive industry is on the front line. Some of the most affected regions are major production hubs and home to key links in the sector’s global supply chain. Typical contingency plans help enable operational effectiveness following events like natural disasters, cyber incidents and power outages, among others. They don’t generally take into account the widespread quarantines, extended school closures and travel restrictions that are being instituted in countries around the world to help stem the spread of the virus. With production shutdowns taking effect, automotive companies need to remain focused and nimble to better navigate this crisis.

The pandemic raises a number of unique challenges. In PwC’s inaugural COVID-19 CFO Pulse Survey, finance leaders in the United States and Mexico shared their top concerns.

The situation is fast moving with widespread effects. That’s why we’ve prepared some general guidance on COVID-19: What US business leaders should know, covering the key areas of crisis management and response, workforce, supply chain, finance and liquidity, tax and trade, and strategy.


What are your top 3 concerns with respect to COVID-19? (Select up to three.)

Financial impact, including effects on results of operations, future periods and liquidity and capital resources
%
Potential global recession
%
The effects on our workforce/reduction in productivity
%
Decrease in consumer confidence reducing consumption
%
Supply chain disruptions
%
Difficulties with funding
%
Not having enough information to make good decisions
%
Impacts on tax, trade, or immigration
%
Cybersecurity risks
%
Fraud risks
%
Privacy risks
%
Source: PwC COVID-19 US CFO Pulse Survey
April 22, 2020: base of 305

What makes the automotive sector different:

Here is our take on some additional issues companies in your industry may face:

Crisis management and response

Issues the automotive sector might face:

The shift in the pandemic’s epicenter to Europe and North America underscores the need for automotive companies to remain nimble in their responses to the crisis. Supply chain disruptions combined with the significant — and growing — macroeconomic uncertainty fueled by COVID-19’s global spread can make formulating the right response a moving target.

Steps to consider:

  • Careful scenario planning is crucial. Companies should not only consider the pandemic’s likely impact across a range of critical areas detailed here, but they also should take into account the volatile economic, policy and financial market terrain.
  • Plans should aim to address the combined challenges of reduced production volumes caused by supply chain disruptions and falling consumer demand for new cars. Government responses to the pandemic are another variable to consider.
  • Automakers should try to stay as agile as possible in light of the uncertain near-term outlook.

Workforce

Issues the automotive sector might face:

Automakers and their suppliers employ about 1 million people in the US, according to the Bureau of Labor Statistics. These employees’ welfare should be the top concern for corporate leaders. A significant share of those people do jobs in factories where components and vehicles are assembled and so cannot be performed remotely. If infections spread and a large percentage of the workforce gets sick, it could drastically reduce production capacity. That means keeping the big picture — a safe, healthy workforce — in focus may also be what’s right for the bottom line.

Steps to consider:

  • Transparent, clear and timely communications to employees are crucial, particularly when the number of reported cases spikes due to improved access to testing. It’s not just about answering employees’ questions, but proactively sharing information that helps to address emerging concerns.
  • Employees who can work remotely will likely need guidance on new ways of working and to be equipped with tools that may be unfamiliar. Expect they may face a learning curve. Clear policies and well-communicated expectations can help accelerate the process and improve confidence. In addition, cybersecurity should be a top priority, as should bolstering system resiliency to better deal with significantly higher levels of remote access to core systems — and because employees and management could be more susceptible to social engineering efforts in the midst of the crisis.
  • For front-line employees whose work continues to occur on-site, auto companies should plan to invest in education campaigns to help employees know how to help to minimize the spread of the virus and what to do if they experience symptoms of COVID-19. Employee health and well-being should be the top priority. Thorough business continuity plans that can help to address contingencies in case of a complete shutdown or a temporary shortfall in a critical role or roles will be tested. 

Operations and supply chain

Issues the automotive sector might face:

COVID-19’s impact on the automotive supply chain may be substantial. Countries that have been heavily impacted by the outbreak, in particular, China, Japan and South Korea, account for a significant share of global auto manufacturing. China’s Hubei province, the pandemic’s epicenter, is one of the country’s key automotive production centers.

The deeper into the supply chain, the greater the impact of the outbreak is likely to be. Automakers with global supply chains are likely to see tier 2 and especially tier 3 suppliers most affected by pandemic-related disruptions. While many major automotive original equipment manufacturers (OEMs) have instant, online visibility into top-tier suppliers, the challenge grows at lower levels. 

Steps to consider:

  • Companies with extensive international supply chains may need to assess critical components that may be in short supply and should consider triggering alternative sourcing strategies. While most North American assembly plants depend on China for some auto parts — in particular wheels, brake and steering components, and electronics — many of these parts could potentially be sourced locally or from other markets.
  • Everything should be on the table for consideration, including changes to vehicle design and materials when possible and as required. Planning should go deeper than merely identifying alternate suppliers. Companies should also take into account the potential tax and tariff implications of supplier changes as well. These could include customs and duties, as well as transfer pricing considerations if the substitute components or materials are internally sourced.
  • Consider taking steps to improve supply chain visibility and lines of communication to better detect potential problems early and work on remediation plans. The COVID-19 outbreak can provide the auto industry with an opportunity to demonstrate its mastery of the difficult lessons of the 2011 earthquake and tsunami in Japan, which caused headaches for the global auto industry for several weeks because of shortages of certain paint pigments that tracked back to a tier 3 supplier there. Digital supply chain transparency solutions can help reveal these types of issues sooner and help to enable daily self-reporting with critical suppliers.

Finance and liquidity

Issues the automotive sector might face:

The rapid intensification of the COVID-19 outbreak coincided with the final weeks of the first quarter. For companies in hard-hit regions, such as Italy, France and Spain, that has led to operational disruptions that delayed their ability to finalize financial statements. Additionally, some automotive companies are increasingly concerned about the possibility that the economic impact of the pandemic may cause triggering events for goodwill and long-lived asset impairments, the recoverability of receivables, restructuring actions and/or liquidity issues. To make matters worse, key finance personnel may be directly affected by the virus or forced to shift their focus to mitigating its impact on the business. Reduced productivity of the finance team could make the significant uptick in the volume of work to get through in the coming weeks more daunting.

Major multinational automotive OEMs and suppliers should carefully consider their cash, liquidity and working capital strategies in light of the outbreak’s impact on the world economy and credit markets.

The disruption of the auto supply chain may trap cash that could otherwise be used to fund operations, provide employee relief or better manage third-party financial commitments. Due to the fact that this trapped cash may be idle in the market for an extended period of time, other strategies can be deployed to help mitigate the downward impact.

Steps to consider:

  • As companies update their near- and longer-term forecasts, management should confirm that the requisite analyses are completed (including updated assumptions) and that controls are executed so potential accounting and reporting issues are identified and addressed in a timely manner. This includes developing a work plan that assumes team members are working remotely and appropriately communicating with those charged with governance, as well as external auditors.
  • Address liquidity challenges by performing rigorous, forward-looking stress-testing and sensitivity analyses of the cash-flow statement and whether you have real-time visibility into access to funding, including from alternative financing sources.
  • Adjust financial hedges based on changes to operations to help mitigate risk.
  • Establishing a tactical cash and working-capital framework designed to absorb commercial shocks should be a priority.
  • Analyze capital allocation and budgeting programs and assess their impact on cash and liquidity. Deploy targeted analytics to prioritize working capital levers (such as recalibration of payment run schedules and replenishment of inventory). Cost containment strategies can help manage cash flow.

Strategy

Issues the automotive sector might face:

The COVID-19 outbreak and resulting economic uncertainty may likely reduce consumer demand in the short term, possibly leading to dampened new vehicle sales and deferred spending on nonessential maintenance. In the longer run, these forces could trigger a shift in consumer preferences, much as other global events with significant macroeconomic implications (e.g., wars, oil price swings, etc.) have done.

Rather than suspending investments with an eye to resuming them when the situation stabilizes, companies should reevaluate strategies and portfolio investment in the context of different potential scenarios for the future. By remaining nimble, auto companies may navigate uncertainty today while preparing for an eventual recovery.

In addition, for automotive companies with sound balance sheets and ready access to capital, the disruption caused by COVID-19 could offer an opportunity to gain new capabilities or access new markets via mergers and acquisitions (M&A).

Major multinational automotive OEMs and suppliers should carefully consider their cash, liquidity and working capital strategies in light of the outbreak’s impact on the world economy and credit markets.

The disruption of the auto supply chain may trap cash that could otherwise be used to fund operations, provide employee relief or better manage third-party financial commitments. Due to the fact that this trapped cash may be idle in the market for an extended period of time, other strategies can be deployed to help mitigate the downward impact.

Steps to consider:

  • A key change for companies to evaluate is their strategy and capital planning approaches. We recommend moving to an agile dynamic planning mode, a key tenet of which is leveraging the power of analytics to build a virtuous cycle around your core objectives.
  • When adjusting plans, we also recommend focusing on core priorities and outcomes rather than trying to correctly time developments in the global economy and the course of the pandemic.
  • Finally, as you are working on building resilience, keep in mind it is not about creating redundancy, but rather integrating flexibility and agility into your operations.

The way forward

In a time of global uncertainty, it’s easy to lose sight of the big picture. This is particularly true when the memories of the last recession are still relatively fresh. But it’s worth recognizing just how different the current situation is from where we were a decade ago:

  • Our financial system is far more resilient. Many of the structural reforms put in place have led to increased oversight and more reserves. These are designed to help strengthen our ability to withstand systemic shocks and they seem to be working.
  • Many consumers are better prepared. While consumer debt is at an all-time high, it’s far lower relative to GDP than it was a decade ago.
  • Our economy is stronger. The US economy has been chugging along productively, with unemployment at historic lows. Corporate debt is — for now, at least — more likely to be repaid.
  • The damage is likely to be more contained. Certainly, some industries, like travel and hospitality, are reeling from a precipitous drop in demand, and healthcare faces some unique pressures. But, at least in theory, the danger could start to recede in weeks or months rather than years.

What’s needed most now is focus. We encourage companies to start by determining the differentiating capabilities they need to thrive. Even — or especially — in a crisis, you’ll want to double down on what makes your organization unique. Eventually, today’s challenges may even offer opportunities for the industry itself to transform and excel:

  • Companies with strong balance sheets and access to capital markets may wish to consider whether the time is right to explore M&A opportunities. This is particularly true of companies that have a clear view of how they fit into the evolving automotive value chain.
  • It’s likely that the COVID-19 pandemic may result in a long-term revamping of supply chains to better focus on resilience. With learnings from the outbreak, the competitive forefront of supply chain operations may likely move toward more comprehensive, proactive modeling. Companies should understand their supply chains more deeply and in more dimensions. This will help prepare the industry for the next disruption.

For some companies, the COVID-19 crisis may also highlight some issues that have needed attention and can no longer wait. When your team can’t get to the office, you may discover just how many manual workarounds your company has put in place for routine activities. Suddenly, finance and human resource transformation becomes more important. When your data centers are located in affected areas, or scammers try to take advantage of market noise, cloud transformation and fraud/economic crime solutions become a higher priority.

Whether you’re trying to protect business integrity, empower your people, make better/faster decisions or transcend through technology, it helps to take a long view. Once this passes — and it will — where do you want your business to be?

For more than a century, our purpose — to build trust in society and solve important problems — has been at the core of everything we do. We stand ready to help.

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Contact us

Jeff Sorensen

Jeff Sorensen

Industrial Products Industry Leader, PwC US

Ray Telang

Ray Telang

Automotive Leader, PwC US