Digital Cars

Empty Showrooms?

One of the most immediate responses to the pandemic is likely to be the culling of model availability across many car manufacturer ranges. Almost all scale car makers will have a mixed bag of contributions from their car line-ups, ranging from the very profitable to the loss-making. There are a variety of reasons why loss-making cars might have stayed in the showrooms in the past. On some occasions, it is because the model might make a strategic statement about the marque. For example, the Bugatti Veyron project cost the VW Group $2.5 billion to prove its performance credentials. Or, in the case of the Renault Laguna, which cost the French manufacturer $5,150 for every car sold for six years between 2006 and 2012, it could conceivably be traced back to public subsidies originating from the Élysée Palace.

However, with the impact of Covid-19 on the cash reserves of all the major car manufacturers, it is highly likely that only car models making a direct contribution to the bottom line could be retained in these straitened times. According to Monty Meghjee, Majenta Solutions’ Commercial Director, who has spent 21 years watching over the automotive industry, model ranges could be reduced by as much as two cars in 5.

“Based on the evidence around the variation in contribution to margin from different model ranges, the erosion of OEM cash reserves due to flatlining sales during the shutdown and the analysing way the industry responded following the 2008 capital markets collapse in the past, I think a 40% reduction in car model lines would be a reasonable forecast,” he said.

“What’s more, the OEMs will be pretty ruthless about making this transition. I expect we will see some quick rightsizing of model ranges as the boards of the major car companies look for fast ways to preserve their cash position. The decision to cut loss-making models can be executed almost instantaneously,” he added.

The depth of experience at Majenta also gives rise to several other forecasts. One of Monty’s co-directors, Simon Ordish, suggests that a cut in model range will not be the only casualty for the car-buying public. For the models that are profitable and spared the axe, the likelihood is that the variety of configurations and options available for the customer to specify their car will dramatically reduce.

We have seen an exponential rise in the scope and range of specifications available to the customer buying a new car in the past decade or so,” says Ordish. “This brings with it considerable upstream costs in terms of component engineering, manufacturing, supply chain management and increased warranty liability due to the increased array of components that can be added to every car’s bill of materials. Some OEMs had already started to reduce the configurable options before COVID, driven by considerations such as streamlining warranty liability. As it seemed to have a minimal discernible impact on sales, this would be another key area alongside model range reduction where carmakers can save money.”

Ordish argues that while ‘hard’ components will be removed from the configuration options and the parts bin for all manufacturers will shrink, he sees configuration being replaced with customisation.

“Customisation that doesn’t require the engineering of assembled parts such as the paintwork personalisation that became a mainstay of the Mini’s sales success will likely fill the breach to enable new car buyers to retain some differentiation of the car they order and this can be easily achieved on smart production lines without impacting cost.” Ordish suggests.

Digital First?

While options reduce for the customer, there are more positive changes afoot on the demand side of the industry. Across the broad sweep of operations within all global car companies, the progress towards digitisation has been patchy and nowhere more so than in the most analogue of contexts, the sales process, with 99.9% of car purchases conducted on the forecourt.

For customers hoping to return to the car showroom after the pandemic, might have their hopes dashed. In 2018, less than 620,000 cars worldwide were sold online. But forecasts project 6m web-based car sales by 2025, with individual marques such as Mercedes aiming to sell a quarter of all purchases online. With the additional demands of managing social distancing in the showroom and the logistics of test drive car hygiene, auto-makers will be looking to step up the move to web-based sales.

This move, initially precipitated by disruptors such as Teslar and Polestar who sell almost exclusively online – as well as traditional OEMs such as Hyundai and VW who are now looking win the race as the first digital-first car brand – has now been catapulted into a primary strategic imperative by COVID-19.

“Car sales were heading online before the pandemic,” says Ordish, “but for some brands, it was about opening up a supplementary sales channel so they could keep up to speed with the disruptors like Tesla and Polestar. In the space of a few short months, moving inventory online has shifted from supplementary to mission-critical.”

Full Transformation? 

Majenta has been at the coalface of helping the automotive industry contend with the impact of large parts of the supply chain being consigned to working from home, particularly the design engineering supply chain. Under normal operating conditions, this involves the integration of many different design engineering tier suppliers with the OEM, ensuring convergence of standards and workflow, the seamless translation of CAD formats for instance and the broad digitisation of the overall design engineering process.

All of this digital transformation has been eminently transferable to the ‘work from home’ context, which became the top priority of many OEMs in avoiding costly interruptions caused either by their engineering teams or their supply chain who believed their workflows could only be managed in an office context.

Majenta has seen a 300% growth in the use of its digital supply chain integration tool, enerjyhub, and a vast increase in engineering data being transferred across its encrypted and high-speed, secure data transfer system, MX which has risen in volume by over 120% in the last three months. For customers, new cars are therefore continuing to be designed and consistent with many processes that are digitalised, the design is more efficient and is completed to a higher standard than its analogue counterpart.

Simon Ordish says, “Consumers will notice the impact of digital transformation on their car buying experience soon. What may not be so evident is the huge digitisation shift going on long before a car is built. We have been at full capacity at Majenta in the past few months to help our OEM clients to virtualise the intelligent management of their supply chain. Hopefully, by enabling these enhancements, we can play our part in helping both OEMs be more resilient to the financial pressures ahead and ensure the car the customer buys is always a better product.”

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