How the Automotive Industry is acting to mitigate risk during the epidemic

Having been severely impacted by the outbreak of 2019 novel coronavirus pneumonia (NCP), citizens of all sections of society have chosen to fight back. As an essential pillar of the domestic economy, the automobile industry is reacting with determination. All players, including traditional OEMs, new entrant automakers, dealerships, suppliers and financial services providers are rapidly evaluating the influence of the epidemic and taking action to overcome its challenges hand-in-hand with customers and employees.

On 30 January, Deloitte referenced the past practices of multinational corporations in response to emergencies and made 10 recommendations for enterprises ("10 key enterprise responses to an epidemic"). As an extension of this topic, based on our experience in Risk Management over many years, as well as interviews with several executives in the automotive industry, we summarize in this article the latest insights and mitigating actions for automotive companies' reference.

1.   Industry observation:

• Consumers' willingness to buy cars has diverged, and will decrease in the short-term. The willingness to purchase a car of some first-time potential consumers will be strengthened by controls on public transportation in some areas or a desire to avoid crowds due to public health considerations. However, consumers who already own a car are generally more inclined to wait and see when it comes to purchasing upgraded models. Due to the challenging conditions for small and mid-size enterprises amid the NCP outbreak, potential customers of this segment might reduce their willingness to buy and target price range due to concern about their incomes. In addition, the inconvenience caused by the epidemic has further reduced impulse consumption demand.
• Weakening after-sales demand. Impacted by infection controls, a year-on-year drop in average driving mileage will further decrease aftersales demand for maintenance and repair, leading to a visible shrinkage in aftersales throughput.
• Dealers delay resumption of business. Most dealers have postponed the resumption of business to comply with local government requirements, preserve the health and safety of staff or wait for showroom traffic to rebound.
• Greater dealer inventory pressure in the near future. Affected by the early Chinese Spring Festival this year, showroom traffic, order banks as well as vehicle handovers were concentrated in the first half of January. Thus, some dealers have relatively low inventory levels. However, there are still some automotive brands with high inventory levels at their retail ends. Among these dealers, those with a higher proportion of inventory financing will face greater pressure of a squeeze on their own funds to pay for loans or interest.
• Wholesale planning more difficult, and consumption rebound could cause inventory imbalance. Long-suppressed car buying demand is expected to drive a short-term sales boost once coronavirus outbreak control measures show preliminary results. However, given the complexity of the situation, it is difficult to precisely predict the timing and dynamics of this sales rebound. It is therefore necessary to prepare a variety of wholesale plans, taking into account shortages of vehicles and parts in stock due to insufficient raw material supply, delayed production resumptions and reduced transportation capacity during and shortly after the outbreak, as well as intense competition due to high inventory levels being worked through.

2.   Risk response

Concern and support for people, finances and resources are at the center of current risk response actions:

People: Focus on customer demand, create and upgrade customer touch points; focus on employee care, provide protection and guarantee health and career development.
Finance: Focus on cash flow risks, especially in retail channels that are directly affected by the market.
Resources: Reinforce upstream and downstream collaboration; improve supply chain flexibility

These areas of focus can be broken down as follows:

• Focus on customer demand, create and upgrade customer touch points:
  • Guide epidemic prevention, ensure health and safety. Enterprises should prepare and issue a "Dealership operation manual during epidemic prevention", with detailed instructions on: establishing an emergency team and material reserves for epidemic prevention, requirements for people and environmental sanitation, updates on sales and aftersales process standards, disinfection treatment standards, emergency treatment of suspected cases, etc.
  • Utilize digital tools, enhance off-site sales service experience. Since customers are currently unable to visit showrooms to see specific models, we propose that OEMs and dealers utilize digital tools in their retail service. For example, live broadcasts, short videos and VR showrooms will be effective ways to generate traffic. Furthermore, WeChat groups can be used for demand analysis and product introduction.
  • Take the initiative to contact customers, upgrade aftersales services. To avoid concern on the customer-side, dealers should take the initiative to contact vehicle owners in multiple ways. Customers should be informed of the resumption date of aftersales service as well as disinfection and other protections dealers have introduced for epidemic prevention. Meanwhile, service appointments by phone should be strongly promoted by dealers to arrange vehicle pick-up and delivery within their service radiuses, and value-added packages such as vehicle disinfection. Furthermore, roadside assistance services should be undertaken consistently. In insurance renewal business, we suggest dealers and insurance companies provide electronic renewal services, or provide insurance renewals with free door-to-door vehicle disinfection services. In addition, OEMs may consider a reasonable and appropriate extension of warranties for customers whose claims expire in the first quarter of 2020, and 24-hour remote support for dealers who encounter technical difficulties.
• Focus on employee care, provide protection and guarantee health and career development:
  • Enhance employees' security. The outbreak of the 2019-nCov epidemic could have a serious impact on employees in the automotive industry, especially those who rely mainly on performance income. Therefore, enterprises should properly modify their KPI structures to ensure the income of employees. Moreover, enterprises should provide sanitary materials for employees to secure their working and living conditions. While physical protection is offered, professional psychological intervention could also be necessary for the wellbeing of employees.
  • Support talent development. Increasingly, local authorities are announcing work resumption plans. In the short term, many enterprises will require or encourage employees to work at home and connect via telephone or the internet. Enterprises should arrange online training to enhance employees' capabilities. For frontline sales personnel, online training and assessment on product knowledge and customer reception can be considered.
• Focus on cash flow risks, especially in retail channels directly affected by the market:
  • Implement detailed capital planning with particular attention to cross-industry risks. It is expected that, in the short term, the cash flow of dealer groups will revert to net outflows. Therefore, postponing or reducing unnecessary expenses is strongly recommended for enterprises. Meanwhile, for dealer groups operating in multiple industries, diversified operation will reduce financial transparency, and therefore greatly increase the complexity of cash flow forecasting. Therefore, it is essential to prevent automotive capital leakage due to cash flow usage by other industries within a diversified operation.
  • Conduct channel risk stress testing. OEMs, financial institutions and dealer groups should jointly carry out diagnostic tests on channel risk, and predict their sustainable operating capacity in multiple scenarios accordingly, to provide supporting evidence for further collaboration and support measures.
  • Strengthen support for channels. OEMs should actively cooperate with dealerships through supportive measures, including:
    a) Paying close attention to policy changes and strengthening financing support, for example by negotiating with financial institutions to reduce the repayment risk for some dealerships in response to the recently issued "Notice on Further Enhancing Financial Support for Controlling the Novel; Coronavirus Pneumonia Outbreak (PBOC (2020) No.29)";
    b) Appropriately adjusting KPIs during the epidemic and speeding up incentive payments through prepayment to help dealerships decompress;
    c) Consider extending the exemption period for newly authorized dealerships under construction.
• Reinforce upstream and downstream collaboration, improve supply chain flexibility
  • Enhance upstream and downstream collaboration. OEMs should work closely with upstream suppliers and downstream dealers. By enhancing information transparency, mutual trust can be cultivated, and supply chain flexibility can be strengthened. This will ensure the right models and parts are shipped to the right dealer at the right time.
  • Flexibly adjust supply-demand pace. OEMs and dealerships should establish an approach to adjusting the pace of supply and demand. The general idea is to increase the power of dealerships in vehicle order and delivery, while loosening target requirements and providing an online marketing platform, so as to help OEMs and dealerships generate more effective and efficient responses to the market.
  • Communication between joint venture brands and global headquarters. Dynamic and efficient communication between a joint venture and its overseas headquarters is encouraged to facilitate timely feedback on the Chinese market situation and more reasonable market expectation.

Our interviews with selected automakers deliver a clear message that some of OEMs are trying to react to the outbreak. However the actions taken are not unified across the industry:

In the short term, the issue of inconsistency, non-transparency and imbalance remains throughout the industrial chain and across different regions. In the medium and long term, enterprises should continuously focus on:

a) Enhancing the timeliness and accuracy of information for decision-making;

b) Desktop exercises covering multiple scenarios in a scientific manner;

c) Enhancing risk assessment and mitigation capability at the organizational and institutional level;

d) Optimizing business sustainability plans to avoid just treating the symptoms rather than getting to the root of the problem.

In the long run, China's automotive industry faces a profound transformation towards customer centricity. Although the epidemic has had a short-term negative impact and increased market uncertainty, it is pushing the whole industry to think proactively about how to improve the customer experience and speed up transformation, as well as enhancing solidarity within the industry.

We are glad to see a growing number of automotive industry players combining their efforts and taking action. We believe China’s automotive industry will finally work through the situation and become more mature and confident.