Maintaining Supply When a Pandemic Strikes
For an auto industry already enduring significant structural shifts, dealing with the coronavirus brings a new and stressing dimension.
Just when it seems that the auto industry isn’t facing enough challenges, COVID-19 swoops in out of the blue. No extraneous shock that’s hit the automotive sector in the past decade – including a tsunami, floods, tornados, critical-supplier facility fires and multi-week labor stoppages – compares with this global health crisis. To an extent, the previous events have had a defined impact with a light at the tunnel’s end. COVID-19’s full impact is much less certain.
Both short- and long-term ramifications are likely to result from COVID-19. Beyond the obvious threat to life, the industry must grapple with new supply-and-demand challenges. While disruptions first became obvious through China’s Wuhan area, the interconnected automotive supply chain immediately rose to the surface. Subsequent issues in other parts of China, South Korea, Italy and other countries have and will certainly stress the global ecosystem. I doubt that all issues will be behind us soon, though I’m hopeful that the virus’s spread will be abated in due course.
Global automotive regions under quarantine/restriction have experienced a significant sales decline. Indications are that China sales will be reduced by about 80% in February compared with a year ago – and China, of course, was still recovering from slower demand since late 2018. Other areas under quarantine or heavy mobility restrictions are also expected to suffer in human and business terms.
Consumers not having the need nor ability to travel certainly lack consumer confidence. While the majority of vehicle sales are discretionary, compared with the need for food for example, car buyers must have the following planets align: the ability to purchase, longer-term economic confidence, and a desire to become engaged. COVID-19 threatens that alignment, underscoring how fragile the industry can be – from both ends.
Similar to the effect of trade tariffs, OEMs and suppliers will need to absorb the coronavirus’s impact on labor productivity, capacity utilization, plant maintenance and uptime, logistics efficiency and freight costs, to name a few key business metrics (while greatest concerns are for all staff who may be exposed). Keeping assembly lines and related manufacturing systems moving will be challenging for an uncalculated amount of time. This short-term focus on ‘firefighting’ these issues blurs the focus on long term planning. For an industry amid significant structural shifts, this ongoing barrage is already stressing organizations and will continue to do so.
There is other fallout directly related to COVID-19. Several auto shows and major industry events have been cancelled, delayed or severely altered out an abundance of caution over the health threats that can be exacerbated by large public events. Many vehicle launches have shifted to virtual reveals versus in-person events. Business travel has been curtailed substantially. The ability to check tooling in China or support for key product launches becomes strained.
I expect the impacts of the COVID-19 outbreak to linger through the summer. Suppliers seeking to visit customers to introduce new technologies and explore business opportunities will find that building relationships is more difficult “virtually” versus in person, as it’s still commonly done within the procurement, design and engineering worlds. And, no handshakes for a while.
The industry will emerge from the COVID-19 ordeal at some point, but questions from past crises are again under discussion. Are OEMs and suppliers still too exposed to single-sourced critical components? As new technologies such as electrified propulsion, increasing vehicle automation and lightweighting are adopted, it is likely that the industry may become even more vulnerable to externalities. Redundancy, dual sourcing, and backup systems may be a luxury which a competitive industry cannot afford.