# # # #

Understanding Economic Adversities: The Automotive Industry

Understanding Economic Adversities: The Automotive Industry

By Shankar Subramanian, Mobility Product Owner at NETSOL Technologies, Inc. on 15-12-2020


infected millions of individuals at a startling pace. Global economic activity was brought to an abrupt standstill as policies adopted by countries to mitigate the spread of the novel Coronavirus included stringent restrictions on human mobility. As the toll on health and humans continues to grow, the economic damage is evident across almost every industry. This unprecedented scenario can be considered as the largest economic shock the world has witnessed in decades

Despite the efforts of policy makers to counter the economic recession with fiscal and monetary stimuli, the Global Economic Prospects (June 2020) has forecasted a contraction of 5.2% in the global GDP for 2020. When the impact of the pandemic on the global economy is further segmented and analysed, we can see that the automotive industry has witnessed multiple supply and demand side shocks. This sector is struggling to cope with a hasty and abrupt stoppage of economic activity and human mobility, as production facilities are put in lockdown with supply chains grinding to a halt. GlobalData (2020) has assessed that factory closures in Europe and North America alone have resulted in the removal of 2.5 million passenger vehicles from the production schedules, accumulating US$77.7bn in revenue loss for automotive manufacturers. As per IHS Markit estimations for 2020, the economic downfall caused by the pandemic in 2020 has adversely affected the global auto sales trend.

The figures are set to decline by approximately 22%, resulting in only 70 million vehicles sales instead of the estimated 90 million units. The situation in the US is predicted to be even worse with a decline of 26.6% for the total sales, where only 12.5 million vehicles will be sold instead of roughly 17 million. Furthermore, Accenture (April, 2020) reports that the global impact of the pandemic consists of more than one variable; automotive production facilities closures, diminishing demand for vehicles, challenges with supply of parts and labour safety SOPs will have a major economic impact in the short to medium run. The global automotive production is estimated to decline by 16% in 2020. Hence, the industry has to go through varying adverse demand as well as supply shocks.

Enterprise response.

In the 2010s, the digitisation of existing analogue and manual systems was almost complete, which ushered the era of digital transformation at an enterprise level. Studies in the recent past (Harvard Business School, 2016), have suggested that companies which digitally transformed their business operations witnessed an average growth of 55% in gross margins over three years while, on the other hand, businesses which were hesitant in embracing digital tech had significantly lower margin growth of just 37% during the same period. This goes on to show that even before 2020, digital transformation was on the rise with credible studies confirming the positive impact.

However, most of the digital transformation efforts were focused on specific segmentations such as Millennials and Generation Z which represented the biggest consumer group in history. Even though these two are categorised as different generations, being part of the digital revolution brings them together. However, now the landscape has changed. Amidst the ongoing pandemic, businesses have seen significant growth in the adoption of smart technology. As per a survey conducted (2020) by Econsultancy and Marketing Week, a fifth of large enterprises (with annual revenue of more than £50m) have scaled-up investment for their digital transformation. Other studies also suggest that the lingering impact of Coronavirus has fast tracked digitisation by up to five years.

Now, an enterprise's ability to cope with varying trends and consequently make informed decisions is considered imperative to business wellbeing. Advanced data processing and analytical capacity of AI tech has come into its own for enterprises striving to navigate economic turbulence while maintaining high performance levels and service quality. EasyJet, one of the renowned names in the airlines industry, has partnered with a UK-based AI firm and Black Swan Data to reorganise its food supply chain. With a mix of AI and machine learning (ML) the company can now estimate food consumption patterns and predict what customers demand and when. This enables EasyJet to order as per predictions and reduce waste and consequent costs incurred through inefficiencies (Telegraph, 2020).

Moreover, reliable network connectivity has played a vital role in supporting 60% of employees in the UK who are working from home (BusinessWest 2020). Ease of access to an essential digital toolkit for work is ensured - consisting of emails, shared cloud-based drives and instant messenger services etc. While connectivity was largely enabled by copper and fibre wire, 4G and 5G networks also have a considerable role. As reported by Vodafone, if the eventual rollout of 5G is brought forward to year 2025, productivity in UK's economy could gain more than £38bn and £158bn over a 10-year period. In the wake of the rapidly changing business environment, many companies have accelerated their pace to adopt digital-first models. E-commerce has also taken centre stage as one European variety-store chain, for example, rapidly deployed a completely operational e-commerce business model in three months.

The online store was interconnected across all major business functions. Along with digitising operations, it is also recommended to restructure the customer journey in order to enhance engagement levels. For example, an automobile manufacturer has now gained the ability to handle business operations that were previously executed by dealer networks, such as financing, servicing, and delivery of vehicles (Mckinsey 2020).

Table 1: App download activity during Covid-19 pandemic

Change in human behaviour and digital touchpoints: Covid19.

In today's environment, unified sales channels and digital customer service support are imperative to business wellbeing. With stringent Covid-19 mitigation policies imposed such as lockdown, which had a devastating economic impact, many businesses had to close their brick and mortar stores. This meant that both consumers and sellers alike had to swivel overnight to a new normal; digital reality. A study (Deloitte, 2020) highlights this by showing how the digital realm has enabled businesses to survive and even flourish. Consumers are now buying more online, as digital sales grew by 18% in Q1 2020 compared to Q1 2019. Moreover, web traffic has increased by 13% in Q1 2020 compared to Q1 2019 with Desktop and Social Surge in traffic.

With people stuck in their homes and facing barriers to mobility, there is ample evidence to suggest that human behaviour has been altered as digital touchpoints to replace orthodox sales funnels. It is evident that businesses, that are part of the industries witnessing a surge in demand for related goods and services due to the on-going pandemic, have invested in digital applications in order to maximise utility gained by their users/customers. Table 1 suggests that apps associated with health, social and digital media have been downloaded a greater number of times and have consequently increased active users.

Similarly, apps for video chat and online conferencing have been most widely used amongst all other categories. On the other hand, apps associated with the mobility and tourism sectors saw a decline in downloads and active users due to the lockdown and other mitigating policies for the pandemic. Technology has played one of the most important roles in empowering humans to meet the adversities posed by the pandemic. It will also be an imperative pillar to help us better prepare for whatever comes next. Covid-19 will help enterprise and governments to restructure and reprioritise technological demands, including greater investment in cloud infrastructure and digital substitutes for touch interfaces.

Table 2: Public cloud adoption for enterprises

Digital transformation on the boom.

A medium-term strategic consideration for many financial institutions before the start of the pandemic, digital transformation, has taken an accelerated path of adoption in most organisations. Integration of digital technology to continuously deliver value to customers is taking priority over all strategic initiatives. Customer centricity and consequent customer satisfaction are some of the main reasons why businesses are going digital. A shift in this direction at enterprise level along with improving digital services are playing a crucial role. Customers are also looking for seamless yet valuable solutions to their concerns and they want them fast. Moreover, digital transformation has enabled companies to capture, record and analyse data easily, which consequently helps the management to adopt processes and techniques that are suited to their requirements in terms of efficiency and effectiveness.

Implementing such business processes enhances productivity of employees and also enables open and smooth communication between departments, teams and individuals throughout the enterprise. Internal alignment forms the basis of strong customer support teams, which can earn greater trust from clients. Through technology and effective communication, concerns of other important stakeholders are also addressed seamlessly. Furthermore, implementing projects remotely or even manually becomes quicker. Hence, digital transformation helps in addressing two key issues related to a business wellbeing by saving costs and increasing sales.

Self-service enablement assists the customer through the complete buying journey and post buying requirements. Automated chatbots powered by AI/ML provide customers with an always available point of contact for resolution and assistance. Gartner states in a recent study that 56% of CEOs claim that their digital improvements have already increased profits. Utilising IoT to generate usage data for assets and further employing big data for predictive analytics and for gauging the customers trigger points in the buying behaviour for advertising, upselling and cross-selling is being used by many brands.

VR showroom and shopfronts can also be seen in execution by most manufacturers to provide experiential selling. Studies (Mckinsey, 2020) have shown that companies that have digitally transformed and integrated cloud technology will bring new capabilities to market more rapidly, innovate easily, and scale more efficiently-while also reducing technological risk factors. The big leap in digital transformation came through with the enrichment of tools that enabled teams to work from home, communicate and collaborate. All major products in the market saw immense growth in adoption and this trend will only go up with time.

Rise of the cloud (blend).

The worldwide public cloud services market is predicted to grow 17% in 2020 to a total of US$266.4bn, up from US$227.8bn in 2019, according to tech analyst Gartner. The global cloud computing market is expected to reach US$623.3bn by 2023. With improved security and privacy on the cloud, there is little left to stop organisations from making the shift. Moreover, organisations seeking expanded service availability (like ATMs) will be depending on distributed cloud to services available closer to the users that need to access them. During the first quarter of 2020, cloud spending increased by 37% to US$29bn (PWC, 2020). Reports suggest that the upward trajectory is likely to continue due to the urgency and demand for scalable, secure, reliable and cost-effective off-premises technology services.

Moreover, cloud spending is projected to grow 19% for the full year regardless of the foreseeable economic adversities in the wake of Covid-19 (Gartner, 2020). The intent can be assessed from a recent PwC survey, which states that almost 75% of finance leaders who were surveyed were strategising to opt for a more agile business environment in the future considering the cloud's flexibility in terms of costing and scalability.

Table 3: Public cloud services for enterprises

Takeaway: Closing remarks.

Business decision makers who aim to improve enterprise-wide performance through the use of digital technologies too often focus only on a specific tool and ignore the holistic nature of the process. Digital transformation processes should be channelled by the broader business strategy. Adopting any particular technology alone cannot deliver "speed" or "innovation". Hence, it is important that digital strategy is aligned with business goals to highlight the best possible combination of tools required for an organisation as they vary from one vision to another.

Clearly, the Coronavirus pandemic has changed both the course and the pace of digital transformation throughout the globe. This trajectory is likely to lead and continue into 2021. Studies suggest (Behnam, HBR) that organisations with successful digital transformation initiatives were the ones that went back to rudiments by initially focusing on altering the mindset of their workforce and consequently changing the organisational culture and day-to-day business processes.

This was backed by the integration of essential digital tools as well. Hence, the change in these organisations using technology was made by actions that were planned by the key decision makers. It was not the other way around. Similarly, the automotive industry is set for a change where the attributes and features of vehicles along with consumer experiences are already in transition towards digitisation. For automotive manufacturers to provide greater value with respect to these disruptions, a shift from orthodox, disconnected manufacturing processes to an integrated and digitised ecosystem is imperative.

Written By:
Shankar Subramanian, Mobility Product Owner at NETSOL Technologies, Inc.

Share Via Whatsapp Back to Articles


View our collection of material and relevant resources pertaining to the global finance and leasing industry. Download Infographics, Profiles, Videos and Whitepapers.