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Challenges the Automotive Industry Faces

Financial Challenges: The U.S.-China Trade War

China is not among the leading finished car suppliers to the U.S. As per statistics from the Commerce Department's International Trade Administration (ITA), China has sold approximately 51,062 passenger vehicles worth USD 1.3 billion to the U.S. in 2019, which is relatively low compared to U.S. imports from Spain, Sweden, and Slovakia. However, China is the second-largest supplier of automotive parts to the U.S. after Mexico. The country accounts for 15–18% of U.S. imports. Similarly, Germany, Japan, France, India, and South Korea are significantly dependent on China for exports of automotive parts and finished automotive.

The U.S.-China trade war in 2018 has disrupted the global automotive supply chain in terms of prices, sales, economic output, and employment. Several Chinese automotive part suppliersfeel the squeeze as they struggle with the 10% duty on exports to the U.S. per Section 301 of the Trade Act imposed on Chinese goods by U.S. President Donald Trump. As per a study conducted by the Ministry of Commerce (China), the U.S. accounts for about 18–20% of China’s total exports, and there has been a 15–20% decline since Q4 2018.

As an impact of the trade war, underperformance is evident as key automotive players, Volkswagen, General Motors, Daimler, Fiat, Honda, Ford, Toyota, and Nissan, which together contribute more than USD 800 billion in market capitalization (Mcap), are trading ten times less than historical earnings. Additionally, the tariff has compelled these automakers to update their business models that focus on a complex web of suppliers from emerging countries, such as Japan, Germany, India, Brazil, Spain, and South Korea.

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Regulatory Challenges


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With the concepts of ‘Go Green’ and ‘Global Warming’ materializing, several lawmakers around the globe are considering fuel efficiency and emission control a high priority. World leaders are representing approx. 195 countries have adopted universally binding pacts, namely the Paris Accord (2016) and Global Climate pact (2015), to limit global warming to below 2°C by 2050. To meet these objectives, it is imperative to cut Green House Gas (GHG) emissions by approximately 85% within the upcoming 33 years, and CO2 emissions need to be reduced by an average of 2.6% per year.

In response to these changes, automotive manufacturers are increasingly investing in independent and shared vehicle companies and simultaneously setting aggressive autonomous and electric vehicle targets. For instance, in January 2020, General Motor (GM) unveiled the self-driving car unit 'Cruise,' a prototype electric vehicle with no steering wheel or pedals for use in its planned autonomous ride-sharing service.

On the flip side, such business opportunities introduce a new set of challenges the manufacturers have to face to adjust to the changing market landscape. Nearly 40–50% of global automakers risk penalties for missing emissions targets, with about USD 1,021 million at risk. In Europe, emissions are expected to be reduced to a fifth of the actual amounts over the next five years, compelling automakers operating in the region to increase their EV sales by about 20–25% till 2025. 

Technological Challenges

The technological revolution has proved to be a boon to the automotive sector.

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This is a result of the increasing consumer demand for cars that are sophisticated tech hubs, which is directing automakers to focus on the next level of material technology for structural safety purposes. In line with this, automakers will need to secure new supply chain members, such as application developers and software companies, which poses a constraint on operations and productive output parameters.

Similarly, 5G specific automotive applications will be market-ready as they are highly associated with the concept of ‘Connected Cars.’

  • Vehicle-to-everything (V2X) communications: A short-range wireless vehicular system through which vehicles communicate with, not only other traffic but the very environment around them. It encompasses vehicle-to-vehicle, vehicle-to-pedestrian, vehicle-to-network, and vehicle-to-infrastructure
  • Cooperative Intelligent Transport Systems (C-ITS): The concept refers to two or more ITS subsystems, e.g., vehicle and roadside subsystems, collectively offering better safety and efficiency in the transport network. It goes hand in hand with V2X to ensure that a given vehicle maintains a safe distance from both the road and roadside obstacles.

Such a drastically changing technological environment is promising but presents unique challenges—engineers face complexity in the integration of modems. For instance, the ceiling of a vehicle that could be subjected to drastic climate change, i.e., it should be operative in both -20 degrees in Michigan winter and 120 degrees in the desert of Arizona.

Automotive manufacturers require proven wireless components and modules that they can integrate into vehicles to materialize the concept of connected cars. The lack of knowledge among automakers about wireless networking and mobile communications has resulted in high dependency on suppliers with extensive experience in the industries.

Latest Thinking

Where the Automotive Industry is Heading

Digital technologies are causing disruptions in the global automotive industry. From 3D printing to digital engineering, internet of things (IoT), and smart sensors, novel technologies are disrupting several domains of the industry, including manufacturing, R&D, marketing and sales, and also post-purchase services. The scenario will lead to the emergence of new players in the competitive landscape, such as software and mobility providers. And the introduction of these players will result in non-traditional advantages that significantly push the envelope for profits.

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Undoubtedly, automakers will have to understand the importance of consumer preference and interactions to sustain the industry's growing and aggressive competitive landscape.

Key Insights
  • Social media will influence about 40% of sales (15 million units; USD 30 billion in revenue) by 2021
  • The dealer's role is evolving: Almost 65% of auto buyers have decided on both brand and model before visiting a dealer
  • Mobile will continue to dominate the device mix: Almost 85% of online research is currently conducted on mobile phones, which is expected to further rise with the growth of smart-phones and mobile internet
  • Younger consumers will lead the digital charges: About 75% of consumers more youthful than 35 reports digital influence on consideration compared to 20% of those older than 35
  • Post-purchase activities are the next digital frontier: By 2021, over 45% of consumers are expected to book services online. About 35% will go online to purchase accessories, up from 15% and 10%, respectively, today.

Digital influence disrupts how the customers engage with automotive OEMs across the purchasing process, which comprises product discovery, consideration to research, and purchase and post-purchase transactions. As per our analysis, auto sales worth 28 million units or USD 45 billion annually will be digitally influenced by the end of 2021. The below figure depicts digital influence and its foothold in the early part of the purchase and post-purchase journey.

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Will Digital Influence Change the Traditional Workflow of OEMs?

The study of consumer behavior indicates consumers make the brand choice long before they visit a dealer, highlighting the importance of investing in the early stages of the purchase process. As OEMs have access to a large volume of data generated online by consumers, digital channels' deployment helps ensure accurate and predictive content, thereby targeting potential customers. Additionally, to ensure accuracy, the newly designed workflow is characterized by integrating evolving technologies, such as big data analytics. The below figure depicts the comparison between conventional and disrupted workflow for new product development in the auto sector.

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Mobility mindsets evolve disruptive mobility models, and new competitors are foreseen as threats for original equipment manufacturers (OEMs). Let’s study an example here on how different ideas about car ownership take precedence.

Apart from the traditional buying and leasing of the automotive, monthly subscription is emerging as an increasingly familiar business model. Consumers are comfortable with the model as one can conveniently sign-up for the desired service and cancel as needed. Our analysis indicates that approx. 45% of lead consumers use app-based taxi/cab services, such as Uber, more than four to five times per week. The trend threatens automakers and results in low sales and profit margins. Our study proposes five critical imperatives for automotive OEMs to tackle the new competitive landscape.

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How Will the Value Chain Respond to Disruptive Changes in Business Models and Production Techniques?

The traditional paradigm is rapidly challenged amid digital disruptions across the value chain. For instance, 3D printing and digital engineering are shrinking, whereas technologies such as smart sensors combined with sophisticated computational capabilities, big data, virtualization, and centralized digital platform are gaining traction. Digital channels have found profound applications in the value chain and are estimated to grow significantly over the coming years. For instance, digital platforms redefine customer engagement as they are in constant touch with OEMs during the purchase and post-purchase. They also help automakers in case of real-time design feedback.

What Kind of Customers Will the Digital Influence Wave Attract in the Auto Industry?

We’ve spoken about how digital platforms will hold a strong position in the coming years, not only as sources of data and an integral part of efficient operations but also as resources to build and serve the correct clientele. Younger buyers widely use digital platforms for online research during the purchase procedure. Our analysis indicates that approx. 55% of the population under 35 strongly considers digital influences, whereas only approx. 35% of the people above 35 opt for online research during purchase.



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The automotive industry is rapidly evolving with disruptive technologies, such as connected mobility, autonomous cars, and V2X. This has created ample opportunity and added more significant challenges for automakers around the globe, which are required to undertake strategic initiatives for coping with the highly fragile market and finding profitable avenues. Thus, many of our solutions in the past have been centered on addressing these challenges. We provide companies with go-to-market strategies that help them stay agile amid market uncertainties and transform their value proposition.

A key automotive company sought our help in analyzing the scope of the global electric utility vehicle market. Our team of analysts estimated the demand and derived an optimized value chain solution with a compelling competitive study, thereby providing the company with a firm base. We also helped a Japanese OEM develop a go-to-market strategy for procurement sourcing outlook for two months. As a result of our consulting services, the client could save 15–25% expenses in several segments.


Our Clientele
  • Aebi Schmidt Holding AG
  • Inzile AB
  • Thyssen Krupp
  • EFI Automotive
  • Alliance Automotive Group
  • Toyota Industries
  • Continental Automotive

Covid-19: What happened and the What next

Impact of COVID-19 on the Automotive Industry

The automotive industry is collapsing under the multi-faceted impact of the COVID-19 pandemic. On the one hand, movement restrictions, lockdowns, and general panic among the public have halted or curbed production at most automotive plants. On the other hand, the pandemic has taken a toll on the global economy, with businesses staying shut and employees being laid-off. The disposable income among the masses is declining drastically, and amid uncertainness about when normalcy will return, the public is apprehensive about spending on non-essentials.

Oil Price Crash

Crude oil prices fell below USD 0 on April 20, 2020. Almost 90% of countries around the world are in lockdown or the process of relaxing movement restrictions. The general 'stay at home' recommendation over the past couple of months has seen the oil demand plummet to an all-time low. The need for automobiles, such as cars, vans, and trucks, has also observed a steep decline in recent months.

The ongoing oil price crash represents a unique opportunity for the emerging markets of Asia-Pacific to build their petroleum reserve. These markets, especially in the Indian subcontinent, are prominent oil and gas consumers globally and stand to benefit substantially by reducing their dependency on foreign reserves.

Figure: Comparative Analysis of Global Automotive Sales for March 2019 – March 2020

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Source: Straits Research Analysis

The above figure indicates a massive decline of 38% in automotive sales in March 2020 compared to March 2019. The temporary shutdown of production facilities across Europe and North America is a crucial factor affecting sales, alongside the declining demand due to reducing disposable income. The production facilities in China are already on their way to recovery, albeit gradually. The economy has effectively controlled the COVID-19 cases in recent weeks and is encouraging the revival of business activities in phases. As per LMC Automotive, Global light vehicle sales are expected to decline by 4.0% to reach 86.4 million units in the year 2020 compared to 90.3 million units in 2019.

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Source: LMC Automotive

Regional Breakdown of the Automotive Sector

Nation-wide lockdowns have severely affected the automotive sector, especially in western economies, particularly in Europe, which is critical automotive manufacturing hubs. These lockdowns have led to the temporary shutdown of facilities, and little sales figures have compelled companies to lay off staff. The European Automobile Manufacturer Association (ACEA) estimates more than 1.1 million (1,138,536) out of 2.6 million European employees working in automotive manufacturing are directly affected by the temporary lockdown. Furthermore, the lockdown has killed the production of 2.06 million units in such a short time frame. The table below includes a country-wise breakdown of production and the number of employees affected.

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Source: ACEA Note: Production Lost= number of Vehicles

Industry experts suggest these figures are expected to rise further as the number of COVID-19 cases increase.  Also, even post lockdown, the lack of liquidity among suppliers could shake up the supply chain, which may damage the consumer purchasing confidence of new motor vehicles and, eventually, result in the sluggish growth of the automotive industry.

Measures to Revive the Automotive Industry

Authorities are taking countermeasures to mitigate the pandemic's negative effect on the automotive industry, such as the Pandemic Emergency Purchase Programme (PEPP). For instance, the European Central Bank (ECB) recently announced a monetary package of approx. USD 815 Billion (EUR 750 billion). The purchase is expected to be conducted by the end of 2020 and includes all the asset categories eligible under the existing Asset Purchase Programme (APP).

The European Investment Bank (EIB) is expected to inject a financing package of EUR 40to eliminate liquidity and working capital constraints. In addition to the package announced on April 3, 2020, the EIB introduced a pan-European guarantee fund of EUR 25 billion, which allows the EIB group to increase its support for all automotive companies in the EU Member States by an additional sum of up to EUR 200 billion.

The European Commission is expected to introduce some relaxation on existing policies to provide financial aid for broader coverage in mitigating the risk of the crisis. Another measure of the Escape Clause was announced by the European Commission (EC) on March 20, 2020, which states that the Escape Clause will allow EU-member states to provide direct grants, tax concessions, and advance payments up to EUR 800,000to companies that require immediate liquidity.

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Source: https://www.acea.be/news/article/coronavirus-eu-measures-to-support-the-auto-industry

The U.S.

Key auto manufacturers, such as Toyota, Nissan, Honda, and Chevrolet, are undergoing a steep decline in over 59,000 units each, and overall sales have dropped by 38% YoY. In response, the U.S. government is expected to bring the scrappage scheme back into the picture, which was previously introduced post-recession in 2008/9. The system would again allow consumers to spend in the automotive sector by replacing their old vehicles, perhaps with relaxation in the purchase of electric cars.


In China, the first two quarters observed a downfall in terms of both sales and production. Since more than 75% of the world’s auto supply chain is connected to China, its decline in sales and production has reflected the world over. As per the China Passenger Car Association (CPCA), in March, the sales of automobiles in China dropped by 83.9% from January to 310,000 units in February to produce a year-over-year decline of 79.1%.

While most of the world struggles to cope with the onslaught of the pandemic, China is gradually returning to normalcy. Automotive plants are slowly revamping their manufacturing operations, and most of the dealers are expected to record shortages in their inventories. Therefore, manufacturing units are working tirelessly to maintain pace with demand. For instance, the Honda-Guangzhou JV plant-based in Wuhan city is currently working beyond its limit to meet consumer demand. Government initiatives targeting the revival of the auto industry are also expected to provide much-needed aid. These include tax rebates and subsidies of about USD 1,400 per vehicle in some provinces and metro cities. Additionally, the government has proposed some relaxation on the purchase of new energy vehicles (NEVs) for two more years.

South Korea

South Korea is also working its way toward normalcy. Leading domestic auto giants, such as Hyundai, GM Korea, Renault-Samsung, Kia, and SsangYong, recorded 10% sales growth in March after slight setbacks in February due to temporary shutdowns.

Post-COVID Scenario: Auto Companies Looking to Move Out of China

Developed economies, such as Japan, the U.S., and South Korea, are expected to move out of China amid fears of a compromised supply chain.

Figure: Automotive Supply Chain

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Source: Capgemini

As per the Nikkei Asian Review, Japan has already announced a subsidy package of USD 2.2 billion for companies to move out of China and offer relief to organize their supply chain. Additionally, the government has asked companies to consider other ASEAN countries, such as Vietnam, Malaysia, and the Philippines. These steps aim to counter obstacles and ensure stable procurement and production in times of crisis and, ultimately, support reforms in industries, such as automobile parts and electronic parts.

Comparative Forecast: 2019 and 2020

Overall, auto sales are expected to take a hit in 2020 compared to 2019. Global lockdowns, labor shortages, disrupted supply chains, and external macro-economic factors are all expected to counter the industry’s revival to some extent.

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Source: Industry Experts and Straits Research Analysis



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