The COVID crisis is proving to be a bigger accelerator for altering the automotive industry in fundamental ways than originally expected.

OEMs must continue to grapple with the challenges brought about by autonomous driving, shared mobility, driveline electrification, but now there are additional changes in manufacturing as automaking transforms to a product from a service. That’s the message emanating from the Society of Automotive Analysts’ 2021 Automotive Outlook Conference.

There’s little doubt that the pandemic impacted the industry, with annual sales falling 14% worldwide, and 16% in the United States, according to Pete Kelly, managing director for LMC Automotive. While Kelly doesn’t foresee a complete rebound in the U.S., he does see a 9% increase to for 2021, with global sales improving to 87 million units from 74.6 million, although a shortage in semi-conductors is holding back production.

(Nissan, Honda slash production due to chip shortages as GM, Daimler, others warn of similar moves.)

But the pandemic’s impact on sales was brief, and its effect on sales not as deep nor as long as the Great Recession of 2009, according to Daron Gifford, a partner at Plante Moran. In fact, as COVID restrictions began to ease, consumers moved to the perceived safety of the suburbs and private transportation, leading to abnormally low inventory levels as production fell faster than demand.

Analysts don’t see inventories returning to historically higher levels, although production will outstrip demand in the short-term as automakers restock their inventory.

However, lower sales led automakers to reduce research and development budgets, causing new tech project delays of up to a year or more, with 13% being cancelled outright, according to Tawhid Khan, a research director at IHS Markit. The just-introduced 2022 Buick Enclave is a prime example of the delay, being pushed back a whole model year due to pandemic-related issues.

More than 50% of companies believe there will be a delay in technology development in upcoming vehicles and launches as a result of COVID.

Phillippe Houchois, managing director, global automotive research for Jefferies, believes that all OEMs should have better balance sheets at year’s end, with the exception of Ford and Renault, as North America remains the healthiest market for volume, mix and price.

Europe is becoming less competitive with the pullout of Honda and Mitsubishi, and Nissan’s curtails its ambitions in the market. Into this improving financial picture is the growing push by governments worldwide to mandate electrified powertrains in an effort to slow climate change.

“Electrification is theme of the next few years,” Houchois said.

Analysts say consumer acceptance of electrified vehicles should accelerate in America as it has in Western Europe. There, overall sales were down 26% last year, but battery-electric vehicle sales rose 86 percent. Houchois said price hasn’t been the biggest obstacle to consumer acceptance; it’s the lack of model availability. “Over the next two to three years, you’ll see a really rapid increase in choice, and that’s going to help a lot.”

Also helping is that battery costs are declining, with both GM and Tesla saying that by mid-decade, battery costs should drop to $60+ per kilowatt hour, a price point that opens the market for cheaper EVs. “The $20-$25,000 level where electrification is still a big hurdle in terms of profitability,” Houchois said.

(Global auto sales expected to rebound next year — but may need til 2025 to reach pre-COVID levels.)

Currently, the Chinese and Tesla currently dominate the market for EVs, a situation reflected in traditional automakers’ share prices, which have a P/E ratio of six-to-12, far less than Tesla’s P/E of 130, which has challenged the entire industry on multiple fronts, and not just on their insistence on selling EVs. It also involves direct selling and total vertical integration from design to manufacture to sales.

“For the traditional OEMs, the big concern is the pace of transition. All the carmakers are developing attractive EVs, but they don’t get rewarded for that because, basically, that is the cost of doing business,” Houchois said.

But traditional automakers are about to face a far more competitive landscape in North America says Daron Gifford, a partner for Plante Moran. “In the old days, we talked about The Big Three and a few OEMs that made most of the vehicles in North America. By 2027, it looks like we’ll have 20-21 OEMs producing vehicles in North America. Many of those are startups, so they will not have large volumes of production, at least not initially.”

Gifford says new OEM programs, as well as those from startups, are leading to unprecedented growth in the segment.

“There are at least 58 new battery-electric-only programs about to come online, compared to the internal combustion engine programs which are about 90,” he said, adding that not all ICE programs are completely new powertrains, and not all of the programs will even see light of day depending on the pace of EV adoption.

Furthermore, COVID has changed consumer desire for healthy, safe personal transportation, and Gifford sees a longer term trend of autonomous vehicles stealing market share from mass transit and short haul airlines. Such use will accelerate vehicle turnover, given these vehicles will be running twelve hours a day, and accruing 100-150,000 miles annually.

“You might like to equate it like a cell phone where we turn it over every two to three years, where a vehicle will turn over every two to three years. We think this is a real opportunity from the standpoint of the industry,” Gifford said.

All of these changes are upon us, he said, ones that will eventually transform OEMs from product producers to service providers.

“Now that we’re in 2021, it’s going to impact us dramatically, very quick, very fast.”

As if to prove the point, Jörg Trampler, director of engineering for car powertrain technology at ZF North America, stated that ZF will be launching a Level 2+ autonomous system for mass production “very soon,” at a cost of less than $1,000. “We consider this being affordable, and a very good entry point into the mass-market,” Trampler said.

(Auto sales gain traction as Americans avoid mass transit.)

“I think with COVID, there was an acceleration of change that was overdue, and was difficult to put in place,” Houchois said. “It’s very strange to say but I think in many ways, the industry is in better shape now than it was a year ago.”

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