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McKinsey & Company: Reimagining the auto industry’s future: It’s now or never

Disruptions in the auto industry will result in billions lost, with recovery years away. Yet companies that reimagine their operations will perform best in the next normal

Electric mobility, driverless cars, automated factories, and ridesharing—these are just a few of the major disruptions the auto industry faced even before the COVID-19 crisis. Now with travel deeply curtailed by the pandemic, and in the midst of worldwide factory closures, slumping car sales, and massive layoffs, it’s natural to wonder what the “next normal” for the auto sector will look like. Over the past few months, we’ve seen the first indicators of this automotive future becoming visible, with the biggest industry changes yet to come.

Many of the recent developments raise concern. For instance, the COVID-19 crisis has compelled about 95 percent of all German automotive-related companies to put their workforces on short-term work during the shutdown, a scheme whereby employees are temporarily laid off and receive a substantial amount of their pay through the government. Globally, the repercussions of the COVID-19 crisis are immense and unprecedented. In fact, many auto-retail stores have remained closed for a month or more. We estimate that the top 20 OEMs in the global auto sector will see profits decline by approximately $100 billion in 2020, a roughly six-percentage-point decrease from just two years ago. It might take years to recover from this plunge in profitability.

At the operational level, the pandemic has accelerated developments in the automotive industry that began several years ago. Many of these changes are largely positive, such as the growth of online traffic and the greater willingness of OEMs to cooperate with partners—automotive and otherwise—to address challenges. Others, however, can have negative effects, such as the tendency to focus on core activities, rather than exploring new areas. While OEMs may now be concentrating on the core to keep the lights on, the failure to investigate other opportunities could hurt them long term.

As they navigate this crisis, automotive leaders may gain an advantage by reimagining their organizational structures and operations. Five moves can help them during this process: radically focusing on digital channels, shifting to recurring revenue streams, optimizing asset deployment, embracing zero-based budgeting, and building a resilient supply chain. One guiding principle—the need to establish a strong decision-making cadence—will also help. We believe that the window of opportunity for making these changes will permanently close in a few months—and that means the time to act is now or never.

This article illustrates winning moves and principles for automotive players, often by drawing parallels to players from other industries that have successfully navigated similar “now or never” moments and emerged stronger.

Radically focus online

Right now, more consumers than ever are using online sales channels to engage with businesses in every industry. According to a recent McKinsey digital sentiment analysis, in Europe, the use of digital channels has increased by an average of 13 percentage points (Exhibit 1). Growth in online channels is high for every country surveyed, but the biggest boost has occurred in Germany, which has seen the use of digital channels jump 28 percentage points in response to the COVID-19 crisis. Moreover, 72 percent of first-time users in Germany and 70 percent of regular users are planning to continue engaging online even after the crisis subsides. According to these metrics, having an online presence may be a game changer for businesses.

Exhibit 1

Automotive players were uncertain about using digital channels before the COVID-19 crisis hit, while companies in other industries aggressively moved ahead. Consequently, the automotive industry now lags other sectors in this area. A 2019 Digital Quotient analysis, which is a McKinsey method for evaluating an organization’s overall digital maturity, revealed that the average automotive business has a clear need to digitize, with the industry earning a below-average score compared with other business-to-business (B2B) players.

Industries in general recognize that remote selling models are becoming the next normal, and some players are already preparing for that in reaction to consumer demand. In fact, according to our analysis, positive customer sentiment for digital sales interactions is now about twice that of traditional models. A recent McKinsey study shows that 96 percent of B2B companies have shifted their go-to-market models in response to the COVID-19 crisis, with 64 percent believing the new digital model is just as effective or more so than before.

Likewise, 32 percent of B2B companies say they are very likely to continue to pursue these sales-model changes for more than a year after the crisis subsides, while another 48 percent are somewhat likely to do so.

Digital laggards in other industries have been able to quickly improve their position, and automotive players can emulate them. One clear success story from another industry involves a traditional German catalog and mail-order retail company. After experiencing increasing pressure and significant competition from online businesses and fast-fashion players, the company created a new platform as an online fashion retailer in 2014. Company leaders executed an internal shift in the business and operating models, focusing on personalized offerings, influencer marketing, and mobile-first offers. In addition, the retailer partnered with Germany’s largest digital-marketing agency to guarantee successful implementation, since it realized that it might need assistance.

Traditional companies might be surprised to learn that the retailer’s app drives 75 percent of its revenues. By betting on mobile, the company outperformed its former competitors and ultimately became Germany’s fifth-largest online fashion retailer. Moreover, the company’s digital platform has won a Shop Award from Internet World Business (a B2B trade journal) for four consecutive years, reflecting its status as one of Germany’s best online stores.

A major US newspaper represents another digital success story. In the second quarter of 2020, it added nearly 700,000 digital subscribers, marking the best subscription growth in its history and outpacing the paid online readership of two of its peers combined. For the first time, the newspaper’s second quarter revenues from digital products exceeded print revenues. Its long-term goal of attracting ten million subscribers by 2025 will be primarily driven by growing its digital subscriber base and digital content offerings, including podcasts, lifestyle offerings, and multimedia products.

Within the automotive industry, the benefits of adopting a digital strategy surfaced early in the COVID-19 crisis. In February 2020, China experienced an 80 percent decline in overall automotive sales. One US electric-vehicle (EV) maker increased its sales in China by over 10 percent, however. The company had already established online sales offerings, including a clearly structured online shop, contactless test-drives, and car home deliveries, that proved effective during the nationwide shutdown.

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SOURCE: McKinsey & Company

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