Congress Conversations Supplement - S3

A NOTE

from our

EXCLUSIVE LEAD

SPONSOR

The COVID-19 pandemic plunged the auto industry
into crisis mode. And, after four months of lockdowns
and historic relief efforts, there is still a high pitch of
uncertainty over what future vehicle demand may look
like and what the prognosis may be for the financial
health of many stakeholders in the auto ecosystem,
especially suppliers. The verdict may also still be out on
the strength - or weakness - of an economic recovery
over the second half of 2020 and beyond.

can, it seems they are less reluctant to cut on innovation.
For instance, nearly three-quarters of CFOs of industrial
products companies PwC surveyed in May 2020 expected
to cancel or defer planned investments across their
business (e.g., operations, workforce, general CapEx). But
just 2% of those CFOs said they planned to cancel / defer
planned investments in cybersecurity and data privacy
initiatives, and just 15% planned to cancel / defer digital
transformations. OEMs will likely be more prudent and
discriminating about which investments they will pursue
in new technologies (e.g., those related to autonomous
vehicles). Toward that aim, they may also become more
aggressive in forming partnerships. Liquidity-strapped
OEMs will likely be pressed to make more near-term
choices surrounding the simplification of the product
portfolio in order to help preserve cash flow - for example
limiting investments to fewer types of powertrain.

Indeed, the state we are in is one of conflicting emotions.
As the country wades into a summer of cautiously easing
lockdowns, there is nevertheless hope for a straightup, speedier-then-expected recovery, yet a spectre of
trepidation looms around the possibility of a bumpier,
W-shaped path.
The auto industry is experiencing the same uncertainties
and competing emotions, and they were articulated
clearly during the recent Congress Conversations
webcasts. An immediate concern is how long some in
the supplier network can last before liquidity may run
dry. For OEMs and Tier 1 and Tier 2 suppliers, a top priority
has been - and will likely continue to be - working closely
with their suppliers to help avert bottlenecks in the
supply chain.

Participants of Congress Conversations seemed to agree
that spending on digital innovations is something the
sector should not be willing to do without. In fact, it
just may be that innovation - namely, the portfolio of
fourth industrial revolution technologies - can serve as a
powerful lever companies can pull at the pivotal moment
not only for their operations, but also for improved
customer service and brand.

Most are already doing so. A recent PwC survey found
that 52% of CFOs agreed that one of the most important
effects the pandemic has had on their supply-chain
strategy is to "understand financial and operational health
of suppliers," and 47% agreed that "developing additional,
alternate sourcing options" was a most important effect.
And for all auto companies, there's the considerable
task of bringing employees back to work safely - while
maintaining or even increasing productivity. Finally, of
course, there's the real prospect of suppliers falling into
bankruptcy if they cannot find ways of maintaining their
liquidity levels over months, rather than over weeks -
especially as they begin to purchase materials and parts
and reopen their payrolls.

Digital transformations have also been introduced into
the workplace during the shelter-at-home regulations,
and automakers will likely take lessons learned in the
last few months into the future. Some companies will
likely continue to layer greater digital connectivity across
numerous fronts: contact tracing workers and adding
automation and artificial intelligence, for instance, to
the shop floors, warehouses and supply chain. Such
investments can help create efficiencies and productivity,
therefore, helping to preserve much-needed liquidity.
The customer may also see the benefits of this innovation.
For example, we heard that automakers have been
improving their capabilities in digital sales and other
initiatives to help enhance the customer experience
during the pandemic. Doing so should be especially
critical at a time when customer behaviors, preferences,
demands and needs may shift so swiftly. It's difficult
to say, however, to what extent such consumer-facing
innovations will turn out to be permanent changes in a
post-COVID-19 world.

Quite likely, the industry may look back on the summer of
2020 as a precarious one in the industry's long history, one
punctuated with periods of bounce-back in the wake of
near-ruin.
Yet, just as the pandemic ushered in a crisis, it also
necessitated a spirit of digital innovation. And we've
heard views about this during Congress Conversations.
It's clear to industry leaders and specialists that the
industry may be ready and able to reinvent itself - yet
again. One way this can be revealed is taking a look at
which areas of spending may be on the chopping block.
As companies hunt for ways to cut back on what they

These points of view help shape a broader consensus
among industry leaders: We may well be on the cusp
of substantial and lasting changes in how the industry
embraces crisis through creativity and innovation. Some
companies may just be beginning to glimpse a silver
lining in the passing storms of the pandemic.

Congress Conversations Supplement

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