COVID-19 and the US Auto Industry: Five Quick Wins to Turn this Crisis into an Opportunity

April 06, 2020

COVID-19 and the US Auto industry:

The COVID-19 crisis has already dramatically impacted many industries and the automotive sector is no exception. This crisis is affecting all sectors of the auto industry with varying degrees of intensity:

  • Dealers: With stay-at-home orders requiring up to 90% of Americans to stay indoors1, many dealerships are temporarily closing their showrooms
  • Manufacturers: Many vehicle manufacturers have temporarily stopped production
  • Suppliers: Many have temporarily closed down their production and if they are still producing, they are trying to address supply issues, e.g. missing supply from China
  • Rental providers: Parking lots across the country are filling up with idle cars as demand for rentals come to a halt3
  • Aftermarket providers: While aftermarket parts and services for commercial vehicles are only slightly affected, parts and services for consumer vehicles are significantly down

To sum it up, the auto industry is facing its biggest challenge since the 2008 financial crisis. So what can the industry do to mitigate this demand crisis? How can you best address this situation once the lock-down is gradually eased?

High fixed costs are extremely dangerous in times of crisis. Therefore 90% of all players in the auto industry are reducing fixed costs. This helps preserve liquidity on the short-run. Measures that have an immediate effect on fixed costs but won’t harm the business when economy picks up again are optimal. As an example: Delaying payments by extending payment terms is helpful. Laying off qualified people is questionable.

While cutting fixed costs is an essential step during a downturn, companies should also focus on the other two variables of the profit formula: profit = price x sales - costs. A recent Harvard Business Review study2 has shown that companies that acted early in the last recession, with a focus on growth and not just cost cutting, were more likely to survive the crisis or increase profitability amidst difficult times.

Based on that finding, here are five quick-win measures in the area of pricing and sales that will set you up for success during the crisis and once the economy recovers:

  1. Reduce financial uncertainty for your customers: The current change in customer demand is driven by social distancing measures due to the health crisis AND by financial uncertainty due to the economic crisis. Implementing short-term measures to alleviate financial uncertainty will go a long way in keeping your sales pipeline and revenue flowing. Many car manufacturers are already putting such guidelines in place, providing 0% APR financing and delayed payment options of up to 90 to 120 days. Hyundai is even going as far as to offer up to six months of payment relief for owners who purchase a car in April and lose their job due to COVID this year4. These bold moves are addressing the right pain points.
  1. Provide in-kind discounts instead of cash discounts: In-kind discounts (providing extended warranty or service contracts, for example) are a great alternative to cash discounts. And why are in-kind discounts better? For three reasons:
    • They generate volume while protecting your list price in the long-run. After the crisis, it will be easier to dial-back in-kind discounts than price cuts
    • The right in-kind discounts are often more efficient than cash discounts. They generate more volume for less investment
    • The right in-kind discounts will generate volume now while burdening your cash-flow AFTER the crisis (e.g. extended warranty)
  1. Adjust your prices to the next pricing threshold: Time and again, research has shown that the willingness-to-pay of customers is very inelastic in front of pricing thresholds, e.g. 1$, 10$, 100$, 100,000$, etc. Find out what thresholds are relevant in your sector and adjust the prices accordingly. Lower prices if they are just beyond a threshold. Increase them, if there is still some room before reaching the next threshold. This measure alone can easily yield up to 0.5% ROS if implemented correctly.
  1. Adjust your prices on inelastic products and customers:  Not all products and customers react the same elastically to price changes. Identify what drives price elasticity and identify outliers with regard to very high and very low elasticity. Based on that you can implement “no regret moves.” Examples for this could be: limit your sales team’s ability to discount on long-tail products or long-tail customers.
  1. Reevaluate unhealthy commercial terms: This is no time to still accept unhealthy commercial terms. Do you have unnecessary legacy rebates or discounts that have been in place for years? Are you paying for all the credit card fees? Are you granting expedited lead times for free? Are you granting shipping for free? Have raw material costs outpaced your prices? Have sales volumes, on which your pricing was based, not materialized? Now is a good time to reassess those decisions and adjust your pricing accordingly.

There are many other quick-wins with regard to sales and pricing that you can leverage in these times. Make use of them.

Remember that the crisis will be over some day. Use potential downtime of your sales force now to come out of the crisis mode faster than your competition. As one of my clients recently told me: “The crisis isn't good for our current business, but it has given us the gift of time to work with our sales people on sharpening our tools for after the crisis. Their reduced windshield time can be put to good use.

The crisis has given us another gift: the gift of video-conferencing. People are rapidly learning how to work from home and leverage the advantages of video-conferencing. The acceptance for this communication channel is soaring and its efficiency is mind-boggling; commuting from your bedroom to your living room and meeting clients or team-mates online instead of in person, saves countless hours of travel time. Embrace this opportunity to stay even closer to your customers, and use the extra time to improve your sales and pricing excellence. You never had the bandwidth for this in the past. But now you do!

Bringing it all together

The Auto industry is in the midst of a dramatic economic crisis. The chances of surviving this crisis and stepping out of it in better shape than before increase when your company is sharpening the tools in ALL of the three areas that affect profit: cost reduction, but equally important, price and sales optimization. There are many top-line quick-win measures in these areas that are low investment and will impact your bottom line instantly.

Implement quick-win top-line levers to survive this crisis. Optimize your top-line strategy and processes to bounce back fast once the crisis is over. Discover that the crisis has given us the gift of time to do so.