Economy

The automobile sector can overcome this crisis

V Sumantran | Updated on May 15, 2020 Published on April 25, 2020

One may logically expect that as we recover from Covid-19, we will experience life “in a new normal”   -  courtneyk

EVs will continue to grow and supply chain resilience will gain ground post Covid-19

By now it is apparent that the pandemic has dealt a setback to human society and the global economy that is unparalleled in living memory.

Crises can alter human society and values for decades to come. Germany’s devastating hyperinflation in the 1920s still shapes the inflation-averse monetary policy of Angela Merkel’s administration. Franklin Roosevelt’s New Deal that pulled the US economy out of the Great Depression in the 1930s relied on interventions such as financial sector regulations, savings insurance, and social security, and these continue to serve US citizens to this day.

The 9/11 attacks on New York’s Twin Towers, and India’s 26/11 experience with terror in Mumbai, have persuaded a modern society to accept the reality of security screening and gun-toting guards in public spaces.

One may logically expect that as we recover from Covid-19, we will experience life “in a new normal”, to borrow a tired but never more appropriate cliché. So, how may we expect the world of mobility and automobiles to change in the forthcoming era?

 

Short-term responses

Understandably, most of the headlines we are fed today deal with short-term responses that will influence but not necessarily determine the future state. Headlines, for example, that the US government will pump in a stimulus package worth 10 per cent of that nation’s GDP. Or, for that matter, the debate as to whether the recovery will be V-shaped or U-shaped. The true long-term trends will be shaped by those indelible impressions on public psyche as a result of Covid-19.

Furthermore, our society has been carrying some burdensome baggage from even before the crisis. We were already witnessing the emergence of strident nationalism across regions and growing scepticism of that foundation of recent economic expansion — globalisation. Multi-lateral trade agreements were being bypassed or ignored, and bilateral negotiations, sometimes accompanied by rude threats, seemed to increasingly find use.

A slowing down of most global economies led pundits to advise that we must lower our expectations for GDP growth even before the pandemic was imminent. Fragile social safety nets were exposed as a grotesque skewing of wealth and income distribution accelerated. In this sombre mood, it appeared that adherence to commitments towards combating climate change would falter.

The post Covid-19 world that we may expect our society to shape will be guided by a composite of these experiences.

Personal space

At the core, we will come to value our personal space and the need to protect ourselves from potential transmission of disease from human (and animal) contact. Just as global sales of condoms grew significantly after education on the transmission of AIDS, “social-distancing” will have drilled into our collective psyche that it serves as a firewall for disease transmission. Many customers will have developed an aversion to crowded restaurants and packed metro-transits. At the same time, digital tools such as Zoom and WhatsApp have proven their value as virtual communication platforms. The long-held promise of tele-commuting and tele-conferencing will present renewed appeal. The trend favouring flexible work locations and hours, and work-from-home options, will lead to two outcomes.

One, as on-site safety precautions get more complex and expensive, employers will prefer to have fewer staff member under their roof to be responsible for. Secondly, transportation costs (growing rapidly in most economies) and related time and inconvenience can be significantly reduced. Finally, lockdowns in many nations have dramatically witnessed the re-emergence of blue skies and a clear atmosphere. This irrefutable evidence of the role of human activity in contributing to unhealthy air quality will not be forgotten.

Demand and supply

At the same time, for some years to come, industry will be working hard to set right its ravaged finances. The pandemic has uniquely triggered a simultaneous collapse of demand and supply. Resurrecting both will take some time and even with the most liberal of government grants and loans, financial recovery will be slow and painful. The focus on cash conservation and deferment of capital expenditures will not be easy for the auto industry, which is caught in the midst of massive investments in electrification, connectivity and autonomy.

Even factoring in diminished enthusiasm for climate change priorities, the transformation of the industry towards EVs will not be easy to halt or change course. Investments committed to new EV products and their new factories cannot be recalled. A fundamental re-architecting of supply chains will also be inevitable for most nations and industries. In 2011, the auto industry faced a wakeup call when the Fukushima tsunami severely disrupted supply-chains that spanned the globe. Many industries appear to have just hit the snooze button and proceeded with business as usual. Covid-19 has amplified the importance and urgency of having resilient supply chains and many organisations may not recover from the disruption this time.

So, taking stock of these factors, one may anticipate some vectors of change for the global auto and mobility industry. We may expect some reduction in travel where many interactions are replaced by virtual connections. The balance between personal transport and mass-transit (or shared mobility) will be influenced by an altered perception of cost and the value of personal safety.

The drive to electrification will most likely continue but will seek courses that are more capital efficient. This will lead to a further wave of industry consolidation as automakers seek better leverage of their R&D and investment. Continued dependence by global manufacturers on single sourced parts, and concepts such as China being a “manufacturer for the world” will shift towards a more resilient supply chain with multiple on-shore or near-shore sources.

As Stanford economist Paul Romer counselled, “A crisis is a terrible thing to waste”. The vectors described above chart the prevailing winds we may expect in the coming years. We will need astute captains of nations and organisations to steer a course for the auto and mobility industry so that it emerges to be productive, sustainable and accessible to all sections of society.

 

Dr Sumantran is the Chairman of Celeris Technologies and the author of ‘Faster, Smarter, Greener: the Future of the Car and Urban Mobility’

Published on April 25, 2020

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