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Effects of COVID-19 in the automotive industry – consequences on supply chains, sales, and customer behavior

Author Pinar Celik
Date 07/30/2021

Executive Summary

The automotive industry on the verge of transformation had to fight the largest crisis of the century, the COVID-19 pandemic. Long-coming trends of shared economy, autonomous driving, connected cars and electric vehicles were all affected.

The shared economy took a turn and evolved into individual once again. Hygiene concerns and less need for transportation made the trend come to a stagnation, also autonomous driving took a hit. Businesses evaluated short-term capital management instead of technological developments and innovations as more important. Since the pandemic had a massive effect on highlighting the importance of sustainability, the demand for electric vehicles will continue to increase in the pandemic aftermath.

Companies all tried their best to take according measures to survive the crisis. However, it has not always been enough to prevent supply shortages or adapt to changing customer behavior. Supply shortages and delivery bottlenecks were anticipated but a late supply crisis after the easing of the second lockdown and temporary production still stands were unforeseen. Due to semiconductor delivery bottlenecks, the automotive industry took an even harder hit than ever imagined.

The pandemic also changed the buying behavior – it raised the demand for online buying massively and accelerated the process towards digitization. As a result, dealerships needed to adapt to the new needs such as contactless vehicle purchasing. It is safe to say that this change in buying behavior is not just temporary.

Looking at the big picture the pandemic had substantial effects on every single segment of the automotive industry – it changed how they used to operate. The latest developments in supply chain and customer behavior guaranteed that the “new normal” is going to be more than a few adjustments. It will mean constant business model innovation, rapid digitization, advanced supply risk control and making the most use of advanced technologies to prevent another crisis.

Effects on the automotive industry?

The automotive industry is the heart and soul of the German economy – it employees more than 800,000 people1 and generates over 400,000 million euros revenue per year.2 The internationality and the complexity of supply chains make the industry particularly fragile to external shocks like the COVID-19 pandemic.

What started as an economic uncertainty turned into one of the biggest economic crises of the century. The automotive industry has not been through a rougher patch since World War II. Even though the consequences are similar to the 2008 economic crisis the globality and the uncertainty of the events prevent a rescue from external markets. The demand for new vehicles has fallen 11% in the German market during the pandemic.3 With their originally anticipated 2020 volumes, original equipment manufacturers (OEMs) cut production levels in Europe by 16%.4 Approximately 95% of all German automotive-related companies have been forced to put their workforces on short-term work during the COVID-19 crisis.5

This global downtime in production rose many questions. The industry was on the verge of transformation before the pandemic preparing for the electric vehicle revolution. Emerging technologies like electric vehicles, autonomous driving, shared economy, connected cars all took major hits. The long-coming trend of shared mobility suddenly took a turn and private vehicles became the key again. Disruptive innovations such as autonomous driving and connected cars were the leading focus of industry pioneers. However, the unexpected turn of events forced a refocus on the transformation. Businesses had to reprioritize their technological investments and shift their focus on survival.

Figure 1: Three point view of uncertainties

Survival during the pandemic did not exactly mean stopping technological innovations completely but considering higher importance on crisis management and strategy. Therefore, businesses should have observed the change in customer behavior closely and take actions regarding their business and sales models. The first lockdown resulted in an extreme drop in demand for new vehicles. Established businesses that predicted the shortage of capital and took accordingly measures managed to survive with minimum negative consequences. For small to midsized startups, the impacts were severer. They needed to take more drastic measures in shifting focus e.g. by cutting back the investments in technologies to succeed in short-term cash management.

Even though there was a shift in innovation this does not indicate that the automotive industry will stop evolving and come to a standstill. The COVID-19 pandemic raised the importance of the sustainability issue, meaning the aftermath will accelerate the electric vehicle transformation. Regulatory developments during the crisis such as diesel ban in major cities, government incentives to stimulate the purchase of new electric vehicle sales and strict CO2 regulations are solid proof of how the industry will be shaped in the future.

Seeing all the drastic measures taken by companies, it is evident to say that the traditional decision-making processes have been significantly accelerated as a result of the crisis. It is also certain that the crisis once again highlighted the importance of innovation on digitization.

Now the remaining question is, will this change just be temporary or will it be lasting? To answer this question, supply chains and customer behavior should be investigated further.

Consequences on the supply chains

For OEMs, the crisis did not just mean shifting focus on investments and predicting the falls in demand. It also meant dealing with supply shortages, which were even harder to anticipate. With borders closing every day, public health restrictions shutting factories down, people moving to short-time or remote work, supply chains took an even harder hit. International supply chains were heavily disrupted.

Germany being highly dependent on international supply chains is more fragile to supply shocks. 75% of the products produced in the automotive industry are for export and 2/3 of the revenue is obtained abroad. Furthermore, 1/3 of the primary products come from other European countries.6

Figure 2: Causes of production crisis

Under these circumstances, it was impossible for OEMs to fulfill the planned production levels of 2020. With primary products not being delivered and the need for a vehicle constantly decreasing, the crisis brought automotive production to a standstill. With remote work being forced, demand decreased further causing every second supplier to consider further personnel reduction.7 Since production is constantly oriented to customer demand, just-in-time production created further problems and a combination of demand-side shocks and supply-side disruptions defined the automotive crisis.

The consequences on supply chains are still to be observed in July 2021. Delivery bottlenecks for semiconductors prevented the production of two to four million vehicles in Europe.8 There are many industries depending on chips, automobile industry only holds 12% of the demand resulting in a relatively minor purchasing power.9 However, the low purchasing power does not coincide with the need. To produce an average car, the manufacturer needs between 50 to 150 chips, and since the pandemic raised the demand for electronics while decreasing the demand for vehicles, the monopole manufacturer of chips was commissioned to fulfill the increased demand.  Automobile manufacturers canceled their orders in the middle of the crisis last year to cope up with their demand side, which when the demand bounced back resulted in a late crisis. Since May 2021 OEMs have been closing their production facilities for short terms because of this supply chain disruption. This disruption resulted in the realization of Europe’s and the USA’s high dependency on Asian production, encouraging the USA to implement a plan for local production.

Problems with the unstable supply chains raised more questions on how to prevent delivery bottlenecks in the future. Hyper localization and near-shoring were some of the recommended ideas. Meaning all the production processes will be done in European neighboring lands, and deliveries would conclude with minimal problems and delays. Even though this idea might seem perfect in theory, realizing it is neither practical nor economical, which preventing this action from being taken.

Another realization was what the lack of communication and coordination could do. After the first lockdown measures were eased, the recovery did not go as expected. Missing online and aftersales offers caused massive challenges to OEMs. Also not being able to coordinate the recovery, made it clear that the companies have not been benefitting from the technologies adequately. The lack of cloud technologies and joint data rooms, if established could prevent further global crises.

As a lesson learned from the crisis every business should analyze their structural supply chain fragility.  Identifying delivery bottlenecks, not only in the primary supply chain but also in the external supply chains became vital to prevent shortages in the future.

Customer behavior

Pandemic also had massive effects on customers. The rising trend of digitization once again gained a boost. At the beginning of the pandemic, consumers hesitated to purchase vehicles. Surely decreasing need for transportation caused by remote work and uncertainty of income had massive effects on these decisions. On the other hand, hygiene concerns encouraged individual travel instead of the rising shared economy trend. This customer attitude may result in changing business models in the future depending on the persistence.

Another question on customer behavior is how the crisis will change the buying behavior in the future. According to a McKinsey study based on Google search trends, contactless car buying is a rising trend. Despite the fact that car buying searches have plummeted due to reduced demand for mobility, interest is entirely regained at the end of 2020. The study shows that 60 percent of customers under the age of 45 are considering buying their vehicles online instead of visiting dealerships. With increasing age, this ratio does not change drastically. 45% of potential buyers under the age of 65 also prefer buying online.10 Which brings dealers to take immediate action. The change in buying behavior is rather unlikely to disappear.

Dealerships need to hasten their digitization processes and come up with suitable offers. Since the crisis encouraged needs like delivery of the vehicle straight to the buyer’s home, businesses need to make use of recent technologies, in order to answer how this behavior change is going to shape their future. Making use of cloud technologies and advancing customer data management systems can be a good starting point.

Since the pandemic also increased the importance of sustainability issue, it is safe to say micro-mobility trends such as bicycles, e-scooters, and mopeds will gain higher importance. These could decrease the demand for automobiles, especially in metropolitan regions.

Figure 3: Customer needs

What to expect in the future?

With many aspects, crisis showed us that the future of the industry will not be the same. It is safe to say that the “new normal” would be rather different than the “old normal”. These kinds of hardships occur in every industry throughout time, they encourage innovations and disrupt the old business models.

In this case, the pandemic created an undeniable awareness of the need for digitization. Not just in sales but also in aftersales and among the supply chain. Every business throughout the automotive supply chain needs to adapt to this need. For customer behavior, businesses, especially dealers should take drastic measures and implement digital solutions. They should be able to respond to the changing needs and buying behavior. They should be able to use the technological developments to offer remote buying and delivery options. They should be able to properly follow up digital leads and manage data. To prevent delivery bottlenecks stakeholders throughout the supply chain, need to make use of cloud technologies or joint data rooms, to keep track of their inventories and possible pain points. And these are not the only possible solutions to prevent further crises.

Figure 4: Measures to prevent further issues

Now that the effects of the pandemic have eased, and we are on the way towards building the “new normal” this does not mean risk management systems and agility have lost their importance. Natural disasters and trade tensions can always arise. Even though the severity of the crises is not predictable, certainly, there will always be another crisis ahead.

Within every crisis lies a business opportunity. In this case, it is certain that the future of automotive is digitization. Businesses that can change and adapt their business models, can fulfill the need for agile solutions, are compatible with responding to changing customer needs, and are willing to offer more will not only survive but also pioneer this transformation.

1,2Statistisches Bundesamt 2021
3,6Bunde 2020
4Brockmeier, et al. 2020
5Hofstätter, et al. 2020
7Bankenverband 2020
8Wayland 2021
9Ziady 2021
10Barchetti, et al. 2021

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Wayland, Michael. 2021. „Chip shortage expected to cost auto industry $110 billion in revenue in 2021.“ CNBC. 14. 5.

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