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Plan in waves

Auto sector: Plan in waves

Plan in waves

Dieter Becker | Partner,

Now we know what disruption – that buzzword from the past decade – really feels like. Idle factories are not uncommon during the holiday season but rather a painful sight in the months where output should be at its limit. The coronavirus has now led to a shutdown of almost all automotive plants across Europe and the US. While the health and safety of their workers is undoubtedly the top concern of all managers, they must steer their companies through these times of turbulence.

Start planning in waves

The virus sets the pace first. With its apparent origin in China, it was the Chinese market which was first affected by lockdowns and other safety measures. As the virus spread so did the economic impact. But it might only be the first wave. Therefore, automotive companies are caught in a slightly asynchronous world. Some markets are recovering, others have just shut down. Sophisticated wave management models are now required.

Time delay within the supply and demand chain will bring us into a double five-month wave effect with fluctuating capacity utilization:

  • The first 4-6 weeks: a near shutdown running at a capacity of max. 10-20 percent.
  • next 4 weeks: gradually ramping up production to 50 percent
  • next 4 weeks: increasing production up to 80 percent capacity level
  • following 1-2 months: back to 90 percent utilization plus catch-up effect, if demand can be stimulated
  • if demand side can't be stimulated (which I do believe in), we will enter into a much deeper recession dropping down to 70-80% again, which will lead to much more fundamental changes the following five months, finally adapting production capacities to the new normal demand.

The shift to top-down risk management and quicker scenario planning

The scenario depends very much on government subsidies and customer uncertainty within the market. It is essential to stay informed about government decisions not only concerning safety measures but also about stimuli, changes in subsidies and tax rules. While governments and central banks make all efforts to mitigate the virus effects, I am convinced that in the automotive industry will not be able to survive a similar second coronavirus wave with the same restrictive lock down consequences.

The high impetus of policy decisions demands a shift in risk management. Flexible and quicker scenario planning and budgeting are needed, switching from a bottom-up approach that takes several months of planning to weekly top-down planning exercises using digital tools and mass data.

In summary

This crisis will transform the automotive sector at high speed in two waves implication like a perfect storm, we have not seen since years. To manage this storm, sophisticated wave models are necessary, with a top-down risk management approach that is very much on top of government subsidy programs and other economic policy decisions. How can you use your sales force to help navigate through and plan for the end of this crisis? What role can liquidity play in managing through this crisis? What are some of the new inputs on demand you need to consider? These are a few issues I will address in my next post.