When will happen global reset of the automotive sector

Upcoming challenges and very first predictions

COVID-19 impact on the automotive sector in Slovakia

Key actions

More than 1.1 million vehicles rolled off the carmakers’ production lines in Slovakia in 2019, beating the country’s record by about 7,000 vehicles. This year, the Slovak Automotive Industry Association (ZAP) estimates 1.15 million vehicles will be produced in Slovakia.

Moreover, the automotive industry directly employs over 177,000 people, while generating 275,000 jobs both directly and indirectly, according to ZAP's estimate. It contributed to 50% of industrial production of Slovakia and 13% on Slovak GDP. 

The COVID-19 outbreak has exposed several challenges for the automotive sector.

Consequently, 80 percent of automotive and related companies report that Coronavirus will have a direct impact on their 2020 revenues. 78 percent of companies do not have enough staff to run a full production line.⁽¹⁾

KPMG Automotive Institute believes in a global restart of the automotive sector in 3Q. The ongoing spread and different reaction to the Coronavirus in Europe will delay economic restart, despite ongoing, slow Chinese economic restart. Existing market vulnerabilities (e.g., trade tensions, declining sales) are likely to persist into Q3 given tight inventories (fewer than 6 weeks) and complex supply chains.

From our perspective it is most important to see COVID-19 as a global wave, which has to be simultaneously assessed from a global production and sales footprint. Companies with a heavy production and sales footprint in China already see a direct impact and will now start a recovery phase. Whereas companies with heavy production and sales footprint in mature Asia, Western Europa and North America will be affected when the wave arrives in these regions. 

No one Top 10 OEM has the same production or sales footprint in the world. As the virus is evolving in waves around the world, the ones with heavy footprint in China, who had been hit very hard in February and March, will benefit from slow China economic recovery starting in April and will even see a small boom situation, as the local market will be supported by subsidies from local government.

Our prediction is that companies with either global balanced footprints or companies with heavy footprints in China will experience a lower impact than others, as China is slowly starting to recover already.

All four car manufacturers in Slovakia have stopped their operations, which requires from most of the suppliers in Slovakia to significantly reduce the production volume or follow their customer and stop the operations. Slovak automobile suppliers and OEMs operating in Slovakia are dependent on suppliers from other countries, especially from neighboring countries. To keep the OEM in operations it requires a combined effort of all suppliers to deliver the parts on time. With the outbreaks, many of suppliers experienced shortage of labor and supply of materials from other countries. A key challenge in the current situation will be to continue the efforts of Slovak car manufacturers to provide staff and suppliers with stability and reliability.

Some of the OEMs further plan is to shift the production to electric version of cars, which ultimately represents a new production. In the past, usually engineers from abroad, mainly parent company, supported OEM’s and its suppliers with the start of new production. The entities would need to find the way how to solve this problem.

Another difficulty for the production is the restart of production plans that change almost every day. 

COVID-19’s impact on the automotive sector may take an extended period of time to correct, but auto manufacturers can already consider the following actions:

• Protect and take care of employees: Follow the most conservative guidelines available among leading global and local health authorities (e.g., CDC, WHO). Support any impacted employees per health guidance.
• Create a contingency plan: model cash flows and debt levels, identify critical operations and employees. Create pragmatic, trigger-based contingency plans. 
• Establish a team to focus on supply chain assessment and risk management. Conduct a value chain assessment of other risk factors that may escalate costs and impact service capabilities, take proactive action to address anticipated shortages. Develop supply chain support programs 
• As personal travel has been reduced dramatically, think about changing modes of transportation, e.g., pre-booking air freight or rail capacity (potential switch of airplanes from passenger to cargo freight).
• Work with governments to explore potential tax benefits or to suspend tax payments

^{(1) LMC Automotive Limited, Presentation: 20200312_Coronavirus Impact Assessment_for Amcham_vF.pdf, page 14, 1 und 3 Points} 

Dieter Becker, Partner, Global Head of Automotive

Peter Nemečkay, Executive Director, Automotive