Automotive industry focus: Enabling growth and resilience

Automotive companies have experienced some of the biggest growth surges in consumer behaviour of the last 100 years, so perhaps it’s to be expected that the impact of COVID-19 should slam the brakes on hard? But it’s not just a drop in sales which has impacted the industry, we are seeing a significant change in market demands.

The impact of the pandemic on buying behaviour has seen sales drop due to lockdown travel restrictions, only now picking up again in 2022. But people are covering fewer miles, and switching to electric vehicles (with longer lifetimes), so it is possible that sales may never return to pre-pandemic volumes.

The global microchip shortage and supply-chain crisis have held back orders, but even when these hurdles are overcome, there will be fundamental changes to buying behaviour which will need to be reflected in automotive companies business models in order to succeed.

According to this 2021 article by McKinsey, “64 percent of customers choose to buy from socially responsible brands, a figure that has grown significantly in the past two years. The way organizations step up to play this role for their customers, their employees, and the broader community is likely to leave lasting memories in customers’ minds.”

It’s not just buying behaviour which has changed; the surge in popularity of electric cars has taken new car sales by storm, with Tesla catapulted from niche player to the third most valuable automobile brand according to this Brands Finance focus on Automotive Trends in 2022.

The mechanical simplicity of electric cars is likely to reduce servicing revenue and component replacement revenue for each vehicle’s lifetime. Vendors are moving towards alternative revenue streams, such as over-the-air updates and software upgrades.

Vehicle manufacturers and original equipment manufacturers (OEMs) face a challenge on two fronts – adjusting to an electric future and becoming more digitally integrated with their customers (whether that is consumers, manufacturers, distributors or retailers).

Electric vehicles and their impact

It wouldn’t be a fair discussion of the automotive sector in 2022 if we didn’t mention the impact of electric vehicles. Concerns about climate change, combined with sustainability and emissions targets have driven consumers to consider electric vehicles despite their comparatively high price tags. This change in buying behaviour is in part driven by incentives for electric vehicles across Europe, such as the €9,000 cash back incentive in Germany. That is the carrot, anyway.

The stick is that from 2021, manufacturers face big fines if their fleets break agreed emissions limits, and these targets are set to get progressively tougher.

“Carmakers have to add on average €1,000 of content to cars to make them comply with the new rules,” says Arndt Ellinghorst, an automotive industry analyst at Evercore ISI in this BBC article.

Electrification isn’t just a new paradigm in propulsion, it’s a total sea change in vehicle lifecycle – moving towards over-the-air updates and upgrades, much like phones and computers – as well as ushering in the promise of autonomous driving. Car manufacturers are looking to the rapid evolution of artificial intelligence, in particular machine learning, as an enabler for autonomous vehicles.

Volkswagen is a great microcosm of what the automotive industry is seeing at scale. Learning from the mistakes of dieselgate (the emissions scandal in 2015), Volkswagen has eschewed the internal combustion engine to commit to going entirely electric in Europe by 2035.

Volkswagen said in a statement in June 2021, “We will make our fleet and the entire company carbon neutral by 2050 at the latest. The company has set clear milestones to achieving this in its Accelerate strategy and the Way to Zero program it incorporates. This sees us pursuing what is currently the most ambitious electrification strategy in the volume segment. The goal is for 70% of all new Volkswagen cars in Europe to be fully electric by 2030. This means that Volkswagen will probably produce the last vehicles with internal combustion engines for the European market between 2033 and 2035.”

At the time of VW’s statement, it seemed almost extreme. But reflecting on this in 2022, we see cities across Europe imposing increasing taxes on fossil fuel burners, so much so that by 2035 it may well be financially impractical to drive an internal combustion engine vehicle in much of Europe, let alone consider buying one brand new and facing a lifetime of increasing costs and restrictions. No, now VW’s position seems entirely reasonable and commercially savvy. In two years’ time it may even look unambitious. Such is the acceleration of electrification.

According to Brand Finance, global electric car sales have risen from 4.5% of all new cars sold in 2020 to 9% in 2021, and this growth doesn’t look to be slowing down. According to Experian’s car registration data (via Automotive News), electric vehicles were responsible for 4.6% of North America’s new car sales in Q1 2022.

Whatever the metrics used to determine the growth of electric car sales, and expected growth, it’s clear to see that this is a staggering rate of growth, representing a very electric future for the automotive industry.

Digital transformation

As if people couldn’t get enough of sitting at home, staring at screens, throughout the pandemic lockdowns, customers expect a more digital service from automotive manufacturers – from point of sale and throughout their customer lifetime.

With rising customer demand for more digital experiences, vendors have had to adapt to meet this throughout the sales and marketing process and throughout the duration of each customer’s lifecycle. This doesn’t just apply to consumers, but has ramifications for the automotive supply chain and industry as a whole.

With greater digital connectivity between seller and customer, there is an opportunity to build greater loyalty and advocacy. This cuts both ways, as customers increasingly look to vendors for insight into environmental impact, carbon footprint and information about recycling (from composition to end-of-life disposal). This two-way flow of information through digital technologies has the ability to build value and strengthen commercial relationships like never before.

We already see this growth in digital connection through smart home technology, such as Alexa and Google Home devices, smart thermostats, and security solutions. As people offload tasks to connected smart devices, the relationship deepens. Automotive manufacturers are starting to emulate these changes in future vehicles and integrated technology.

New technologies are set to run throughout the very DNA of future vehicles. As consumers look forward to internet-enabled cars, manufacturers are paying increasing attention to the emergence of the Internet of Things (IoT) and how this will impact the value chain, as more and more component parts interconnect and relay data in real time.

For all the wonders of this increased technology, there are also risks. Cybersecurity needs to be baked in to IoT communications, as the value of the data facilitates increased automation and predictive behaviours that could be hacked for their value.

The manufacturing process is already adapting to incorporate IoT-enabled components in future vehicles. But every change to production lines is another investment to be made when sales volumes are lower than several years ago.

Digital transformation is altering the interplay between vendor and customer in the digital ecosystem, as vendors become service providers with ongoing customer interaction. How are you transforming the role of your business to leverage digital opportunities?

Group purchasing

As Mobility-as-a-Service and other forms of mobility services grow (to an estimated 10% of all vehicle sales by 2030 according to some sources) the power of group purchasing cannot be underestimated. Vendors at all levels of the automotive industry need to look at how they can leverage the cost reduction advantages of group purchasing for both indirect spend and fleet spend.

At Corcentric, we help vendors both leverage the purchasing advantages of group purchasing and the sales opportunities through being instantly connected to a broad base of potential customers.

By connecting to a group purchasing organisation (GPO) via Corcentric, you tap into pre-existing partnerships where discounts have been negotiated and quality is assured. Procurement no longer needs to take so much time and effort, allowing stakeholders to focus on driving value through output.

Alternatively, vendors can gain access to a pre-built customer ecosystem, where sales can massively ramp up without the need for the hard slog of marketing and sales to grow organically.

Financial resilience

Having weathered the impact of the pandemic on 2020-22’s sales, financial resilience is now, more than ever, a high priority for automotive vendors. Supply chain finance has been embraced in all its forms to shore up the impact of sales, production, and shipping delays, as well as enabling businesses to turn burgeoning accounts receivable ledgers into cash to invest in growth.

One great success story here is how Daimler permanently reduced their days sales outstanding (DSO) from 37 days to just 15 days, liberating a significant amount of working capital, but also improving customer experience and reducing overheads at the same time. All without any capital outlay – through the magic of Managed Accounts Receivable.

In fact, managed accounts receivable (Managed AR) elevates the concept of invoice finance to such a degree that it goes beyond simply liberating working capital, to provide guaranteed cash flow, via a non-recourse guarantee against future impact of customers defaulting on payments (i.e. no more bad debt, no more days-beyond-terms, from day one). As a managed service, businesses are able to leverage Managed AR without any capital outlay, or the need to dedicate staff or in-house technology bandwidth to the project.

By increasing supply chain resilience, through finance, automotive businesses are able to focus decision-making on value generation, rather than protecting against financial vulnerabilities in their supply chain. Freeing up the decision-making capacity to become more adaptive to new commercial opportunities, rather than distracted by supply-chain concerns, allows automotive vendors to gain competitive advantage in these challenging times.

Product development

The impact of COVID-19 on automotive manufacturing production lines is still being felt today. Even as much of the western world opens up for business once more, the export of raw materials and global supply chains are struggling to get up to speed again. Recent lockdowns in China have further compounded the impact on the manufacturing process, as components parts are delayed further.

In recent years, automotive manufacturing has embraced just-in-time and lean methodology to optimize efficiency. However, the flip side of this is increased susceptibility to supply chain impacts. Short-term delays can have long-term ramifications, as they cascade down the line.

As automotive manufacturers embrace customer demand for more digital experiences, software development and digital integration skillsets need to be brought into the product development mix. Competitive advantage will be gained through how quickly manufacturers capitalise on changing customer demands, and connect to those customers.

At Corcentric we believe automotive manufacturers need to embrace new ways of working, such as GPOs, and free up working capital to invest today in the changes to product development and service offering which will appeal to their current and future customers. If you would like to know more about how we propose to do this, please do get in touch and we would be delighted to discuss this in more detail.

Contact Corcentric to find out more.