KPMG: The Pandemic Accelerated Industry TrendsBy Alejandro Enríquez | Tue, 10/13/2020 - 06:00
Q: What are the most relevant trends seen in the automotive industry?
OS: The pandemic accelerated trends across different sectors. When it comes to mobility, different OEMs had projects related to embracing alternative models but the pandemic accelerated their plans. There is no defined mobility model that will prevail. What we are expecting is a mix of different alternatives. The most likely scenario is for homes to have a single vehicle while using other mobility alternatives, such as ride-hailing apps. This opens an opportunity for OEMs, given that the life cycles of the vehicles used by these apps will be shorter.
Digitalization is also accelerating. The industry was aware that more and more users went online to research what they wanted even before going to the dealership. According to KPMG estimates, 30 percent of dealerships will disappear as we know them. Companies have accelerated their plans to relocate their operations to Mexico, and less than 5 percent of vehicle production will take place in Europe in the long term. Mexico has also gained momentum due to the status of US-China trade relationship.
The automotive sector has been important to KPMG, not only due to our traditional tax services but also because of the support we offer customers to find opportunities to relocate, adapt or innovate in the Mexican market. We are working with OEMs on designing financial models for new mobility solutions. We are participating throughout the automotive value chain and companies like us can be enablers for these trends to happen.
AY: The pandemic is, indeed, a catalyst for some trends. One of them is taking more local strategies rather than global approaches. Companies and brands need to adapt to their local markets. This is also reflected in the momentum gained by electrification and hybrid vehicles. In one of our Global Automotive Executive surveys, 73 percent of respondents affirmed that country policies and access to resources will be determinant for the adoption of electric and hybrid vehicles. Mexico’s priority, for instance, is oil. Thus, we can expect that ICE vehicles will enjoy a longer lifetime in the market, unlike in Japan or Germany, where access to oil is limited.
Q: What should Mexico do to take advantage of the investment opportunities the trade environment is creating?
OS: The conditions of the Mexican market are quite interesting. Despite its reputation as a low-cost manufacturing destination mostly because of its cheap labor, Mexico is leveling up the quality/price ratio of manufacturing labor. We are not a low-cost country anymore, as Mexico offers global quality. This is evident when we see premium brands ramping up operations in the country. USMCA will provide new momentum for Mexico, particularly due to the Cold War-like relationship between the US and China. Mexico represents a trustworthy partner in the coming years.
AY: Our relationship with the US is key for Mexico’s role in vehicle production. OEMs will adjust as a consequence. This is not mere theory. At KPMG, we support customers relocating their operations and we have seen a renewed interest from companies to relocate operations from the US or China to Mexico. This is happening as we speak.
Q: What is the role of local suppliers in the new USMCA environment?
AY: We are producing high-quality products. The next step is for the country to develop more R&D centers to engineer innovative products in the country. There is a great opportunity for tooling development. By setting the right direction, Mexico could compete at the level of tooling leaders like Japan and Germany.
OS: In the past, there were programs that facilitated the establishment of OEMs in the country; NAFTA allowed this to happen. With USMCA, there is an opportunity to launch a new incentive program for the automotive industry, not only aimed at foreign investment but also at local suppliers. Mexico is strong in Tier 1 and Tier 2 companies but the opportunity lies at lower levels of the supply chain.
Q: What impact will hybrid vehicle manufacturing have on the supply chain?
OS: The resources a country can access can be determined by the technologies it embraces. What is also true for Mexico is that most of its production does not go to the domestic market. Mexico will remain a global vehicle supplier and it is feasible that it will strengthen its position in hybrid vehicle manufacturing as production increases. R&D operations and academia play an important role accelerating this trend. A government policy should also be set in place to coordinate the efforts of all players.
AY: Investment in hybrid vehicles remains a bet. It is an important market but not significant in volume, particularly in Mexico’s domestic market. We are yet to see how the pandemic will influence the evolution of this trend, considering that the price of a vehicle remains the most important element consumers take into account.
Q: What are the recovery scenarios KPMG forecasts for the sector?
OS: Mexico’s GDP has grown at an annual average rate of 2.1 percent. If the International Monetary Fund forecasts are accurate, the Mexican economy will decrease 10 percent, which will be a five-year setback. That is just macroeconomics. In reality, people are losing their jobs. Mexico needs to generate 1 million new jobs a year and this year alone 1 million jobs were already lost. This strongly impacts vehicle demand, and it might take a while to recover. An aggressive economic recovery program is needed to accelerate recovery.
On the bright side, the US, our top export destination, will see a rapid recovery due to its broad economic recovery programs. We are seeing early positive results in the automotive sector. While reaching pre-pandemic levels in the short term seems difficult, the US economy could speed up demand recovery.
AY: There is a cloud of uncertainty above Mexico and the world in general in the scenario before the US election. Five years would be a reasonable period for the industry to recover, disregarding any technological disruptors that the industry might witness.
Q: What are the most important elements when implementing a digital sales strategy?
OS: It is not about changing one channel for another. Omnichannel is the way to go. A vehicle continues to be the second-most important purchase for a family, so the physical experience of a vehicle is also important for the sale. We are also seeing some innovations in this regard. KAVAK is the clearest example of a successful business where they send a car over to your house for you to test it. Dealerships and brands should balance an immersive digital experience with a final physical interaction. An important element in this strategy is to make sure the experience goes smoothly for the user.
AY: A megatrend evident in the industry is that the market is going local. Sales strategies should focus on local customer needs, which cannot be compared with consumers in other countries. Mexico is known for being a market that is focused on affordable options.
Q: What is the role of data business models for OEMs and automotive suppliers?
AY: The key question there is who is the owner of the information that is being generated. Data business models are playing an important role in more developed markets.
OS: In Mexico, companies focused on data are emerging. However, for OEMs, more than an additional business model, data will be an enabler for newer technologies, such as autonomous vehicles, as well as more immersive user experiences that can make the difference among customer’s preferences.
Q: In your perspective, what is the value of the Tesla effect?
AY: Tesla is a leader and the industry is following. The company has been an accelerator for a disruptive change in the sector. Tesla has proven that electric vehicles are possible. Its market capitalization is greatly generated by expectations and not so much by actual income, but its effects will be seen in the years to come.
Q: What will be industry’s key drivers in the coming years?
AY: The main driver will be USMCA, followed by production relocation projects due to Mexico’s unique investment opportunities and the stabilization of its macroeconomic environment.
OS: Mexico has recently surpassed South Korea as the sixth-largest vehicle producer in the world. The opportunity is to strengthen the lower levels of the supply chain. There is room for the country to grow auto parts production while adapting smoothly to electric and hybrid vehicle production. Certainty will play a major role in consolidating investments as well.
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