How Is the Auto Industry Faring During COVID-19?

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Ask any analyst about how industry players are doing during the COVID-19 pandemic, and the answer will most likely have familiar overtones across all of industry. Let’s face it, unless the business name is Walmart, Target, Amazon, or some other deemed essential business, the pandemic and our country’s response to it is showing very little mercy. Whether it’s apparel, real estate, hospitality, transportation, travel or anything other than products and services that are essential to consumers’ basic survival, business is rough!

As our country navigates the challenges of reopening and restarting the engine of commerce, the very standard of what constitutes “doing well” has been redefined. When asked how a sector is faring, most responses from those that have managed to just barely walk out of the economic carnage alive is a comparison to previous worst performances. Suddenly a great financial outcome is one that is only down 45 percent of pre-pandemic activity. When the good news is that you have only lost half the value of your business, there is little need to contemplate the existence of bad news. Most marketers will tell you that they don’t know how to do “off”. It is a opposite of any training and skill-set they ever learned, but shortly after commerce engines shut-off we all began to ask what happened and how we are going to get the wheels turning again once the landscape heals.

The automotive industry is a massive vertical industry of engineering, assembly, parts manufacturers, logistics, dealers and post-sale support services; all intrinsically interconnected to almost every other player in the overall economy. The impact of the shutdown was, and is, huge. According to a J.D. Power survey, new car sales were down by 45% compared to the same period in the previous year. Sales of new cars were fewer by 445,600 units when compared to earlier forecasts. The estimated number of vehicles produced in North America in April 2020 was the lowest since 1945 as the $953 billion industry ceased production across the world. Losses in revenue for some makers topped $2.3 billion per day!

Automotive dealers were confronted with similar challenges. Franchised dealers lost 1.5 million new and used vehicle sales that would have generated more than $41 billion in revenue and an estimated $2.6 billion in profits. As dealers surveyed customer-empty and shuttered lots, the question of how to convert the value of massive and stalled inventory off the lot and into depleting bank accounts was overwhelming. With as many as 20 million workers experiencing layoffs and facing the reality of living on unemployment benefits, the questions for many dealers became: How do we connect to prospective car buyers? Will there be any able buyers, and how do we identify who they are? What will motivate able buyers to make a purchase now?

Dealers quickly worked to convert showrooms and sales floors into spaces compliant with social distancing requirements and up-scaled online presences to better connect qualified prospects with offers. Online purchasing for large durable products and services can be a stressful experience for even the most able online user. Automakers stepped up to provide dealers with the latest online tools. Sales representatives, usually accustomed to a meet ‘em, greet ‘em and press-the-flesh approach to customer interactions were forced to gravitate to building virtual relationships. Campaigns centered around low interest rates, rebates, special “virus discounts”, deferred payment periods and no interest loans with repayments up to 84 months. Lease deals with low monthly payments and smaller amounts due at signing prevailed across all makers. Volkswagen and Ford were the first to roll out a one-year buy-back program for those buyers who purchased a new car and later lost a job due to the pandemic.

The unprecedented marketing incentives to consumers reached a record level of $5,000 per unit by the end of April. Signs of optimism began to appear, portending a quick and anticipated vertical recovery for the remainder of the year. Despite the encouraging performance, many believe that significant challenges remain to be overcome before a new operational normal arrives. As manufacturing plants began to resume production, they faced unprecedented supply chain disruptions and distribution hurdles. Many popular car models and light pick-up models became scarce and hard to get for dealers looking to replenish inventories with the vehicles favored most by customers. Sales incentives don’t work very well for products you don’t have for sale.

An increase in the number of COVID-19 cases in some areas of the country has prompted fears that another partial or complete shutdown of activities is in the future. Doing so promises to be devastating to the automobile industry as it struggles to restock dealer lots and recoup some of its losses following the original shutdown. “It’s incredibly damaging to the economy and to the industry and to the companies to shut down again,” said Kristin Dziczek, vice president of Industry, Labor & Economics at the Center for Automotive Research in Ann Arbor, Michigan.

Perhaps the most damaging element of the pandemic to the long-term financial health of the automobile industry is yet to be fully realized. The life blood of sustainable growth in the auto industry is the development of new models. Extremely costly to bring to market, new products are the way makers retain and acquire new customers and market share. The pandemic has dramatically affected both production launches and debuts of new models. Large auto shows and expeditions, commonly the major pathway to the introduction of a maker’s newest fare, have been cancelled or postponed under strict rules governing the assembly of large crowds. Most automakers have been forced to delay the arrival of new entrants for a year or more and forced to eat staggering development costs. Time is money, and the extension of time to bring new models to showrooms will be painfully costly to bottom lines for those in the industry for some time to come.

The crisis has been unprecedented in our lifetime and its all-encompassing effects will not be fully realized for the foreseeable future. The only certainty is uncertainty across all of commerce and industry, but the auto industry remains resilient.