2020 has been a remarkable year as the COVID pandemic touched our lives in multiple ways. It drove a simultaneous demand and supply shock to global economies leading to an unprecedented contraction of global GDP by about 4.4%. The pandemic created fear and anxiety for the well-being of our loved ones and ourselves, disrupted the notion of seamless global mobility and created competition between countries regarding resources and the approaches taken to combat the disease. Within several countries, the disease was instrumentalised and increased political polarisation.
Yet, COVID was not the only challenge that the global economy faced in 2020. Growth was predicted to slow down even before the crisis. The US-China trade war and Brexit created significant uncertainty for businesses as did the uncertainty about the outcome of the US presidential election. Climate change required urgent action. The list of challenges was indeed long.
A decoupled world
What is then the effect of the pandemic and how will it change our lives and our businesses going forward? In many ways, COVID-19 acts as a catalyst and accelerates existing market trends. While it is difficult to predict the future in volatile times such as ours, let’s look at some of the impacts that COVID-19 is likely to have on global business, government action and markets and how this translates into impact at a company level.
At a global level, the conflict between China’s view of the world and the Western view of the world is likely to continue to escalate. While the tone of the discussion may change due to a new administration in the White House, bi-partisan support in the US and a growing realisation of the need to defend Western interests in Europe should lead to a larger alignment around steps that the West will need to take to ensure transparency and fair competition. The increased role and visibility that governments had to take during the crisis, public perception and understanding of the vulnerability of global supply chains and the perception of dependency on China makes it easier for political leaders to address these issues. As the power balance between state and companies has shifted, CEOs of global MNCs may find it more difficult to protect their company’s interests even if 30 to 40% of their sales and profits stem from China. As always, alignment in Europe will take time and will not be easy due to the relationships and dependencies of different countries on China, however, the trend seems to be clear.
The implications for companies in the West as well as in China are equally obvious. Scenario planning needs to take a potentially decoupled world into account. Corporate leaders need to analyse how to protect both their Western and Chinese businesses under these circumstances. This does not only imply testing supply chain resilience down to the Tier 3 and Tier 4 level, but also asking fundamental questions about organisation and governance as well as technology access. As the experience of European firms in Russia and recently in Iran has shown, it is not easy to navigate bipolar environments. With China, the stakes are orders of magnitude higher.
Global vehicle sales will not recover to 2019 levels for some time. Uncertainty is here to stay and will force corporate leaders to streamline their organisations, re-evaluate their strategic portfolio choices and to drive agility at all levels of the organisation
Brexit still is creating uncertainty at the time of writing this article. Assuming the worst-case scenario of a no-deal exit, Europe and Britain will suffer. However, Britain is likely to be in a tougher spot as the combination of COVID and Brexit will weigh on economic development. Britain’s role in global industrial supply chains will be weakened and the country may find itself challenged as it needs to deal with a potential breakup of the union.
Tensions between the US and Europe will be less visible due to a more diplomatic approach of the incoming administration. However, real progress is needed to re-establish co-operation on both sides including action on long-overdue topics such as the correction of the dismally low German investment in defence. Without material progress, the transatlantic business environment could remain rocky.
Unprecedented support
For governments, the need to support the economy and citizens has been unprecedented. Debt levels have soared in advanced as well as emerging and developing economies with gross government debt as percentage of GDP reaching 131% in the US, 266% in Japan, 119% in France, 73% in Germany and 62% in China. While government support will remain in the short-term, it is not feasible to maintain this level of government action in the mid- and long-term. Among other things, this will drive a wave of consolidations and bankruptcies in the industry, especially for companies that were complacent during the expansionary years leading up to the current crisis.
Corporate leaders have cut cost in an emergency fashion after the on-set of COVID. Looking at a scenario of reduced government support and only slowly recovering markets, many are now turning towards structural and strategic approaches to lowering break-even points and ensuring future competitiveness. Besides an end-to-end process optimisation via standardisation, centralisation and automation, key questions need to be answered. In which markets will we continue to operate and where do we need to find alternative solutions? Which products make sense going forward and which niches do we abandon? What are our future core competencies and how do we re-evaluate our make vs buy decisions? What are key components of our overall investment portfolio and how do we make it resilient in a crisis? How can we benefit from industry consolidation? What type of co-operation models and partners will help us defray investment costs? How can we change the balance between fixed cost and flexibility? How can we accelerate our efforts to drive a fundamental transformation of our company’s business model?
Greener pastures
In addition, as some governments have decided to accelerate the green mobility transition of the automotive industry by leveraging COVID-related investments, the pressure on companies further increases. The current policies around hydrogen, for example, drive the technology development agenda of market participants. OEMs and suppliers face accelerated timelines in the move away from ICE towards a battery electric or hydrogen-based future. Increased public awareness forces leaders to think about the right sustainability strategy of their company. These factors drive massive organisational and capability transformations within organisations at a time when the overall market environment is challenging.
Growth was predicted to slow down even before the crisis. The US-China trade war and Brexit created significant uncertainty for businesses as did the uncertainty about the outcome of the US presidential election
Besides these big strategic questions, companies need to reflect on the changed needs of their employees. Again, COVID acts as a catalyst. For example, as it is easier to maintain social distancing in highly automated factories, automation investments make factories more resilient towards a pandemic. Labour content in vehicles will continue to decrease which may affect strategic production footprints. The layout of offices will need to change to focus more on collaboration and co-creation and office footprint may be reduced as work from home will play a relevant part in employees’ lives. Additional overhead cost reductions will result from reduced travel budgets as virtual meetings have become an accepted alternative to many face-to-face interactions.
2020 was a challenging year for the global automotive industry. Light vehicle sales are likely to contract by 20%; heavy duty trucks by 17% and medium duty trucks by 24% according to IHS. 2021 promises to be better as we have learned to live with the virus and vaccination is around the corner. The situation will depend on regions and products. China’s heavy duty truck market, for example, grew in 2020 but is forecasted to contract in 2021.
Overall, global vehicle sales will not recover to 2019 levels for some time. Uncertainty is here to stay and will force corporate leaders to streamline their organisations, re-evaluate their strategic portfolio choices and to drive agility at all levels of the organisation. The ride in 2021 will be smoother than in 2020, but we need to keep our eyes firmly on the road.
Wilfried Aulbur is Senior Partner at Roland Berger
