How can automotive suppliers mitigate their coronavirus risks?

March 18, 2020

By Dietmar Ostermann and Jeff Sorensen

The latest pandemic, COVID-19, is having a significant impact on the global automotive industry, with its complicated global supply chains. At this time, each of the major geographical hubs is experiencing major disruption. For instance, China is likely to experience about a 15-20% decline in auto production, based on PwC analysis – and that is assuming the virus is soon contained. The auto industry in China has already lost about two million units of production because of the extended shutdowns after the Chinese New Year and the slow ramp-up of plants in early March. In addition, the Hubei region, where the virus outbreak first occurred, is China’s fourth largest vehicle production hub, with more than 2.2 million vehicles produced in 2019. All assembly plants in that region remain shut through at least March 20.

Auto production in other parts of Asia where the virus has spread, namely South Korea and Japan, is also being negatively affected. Many of those South Korean and Japanese assembly plants are experiencing parts shortages for vehicles that are dually produced in China and Japan.

To make matters worse, showroom traffic at most Chinese dealerships was down by 70-90% in February. The industry is anxiously awaiting the upcoming March vehicle sales data from China that will tell whether the virus has created an even bigger demand problem, adding to the pain of a devastating production decline.

The auto industry in general, and the US in particular, learned a valuable lesson from the impact of the tsunami in Japan in 2011. That crisis shut down the global auto industry for days because of shortages of certain pigments needed for paints that tracked back to one Tier 3 paint pigment supplier in Japan. Today, most US, Japanese, and European automakers have good supply chain visibility – often instantly and online – into their Tier 1 and 2 suppliers. In our current crisis, automakers are communicating daily with their Tier 2 suppliers to track the status of their Tier 3 suppliers.

This kind of visibility and communication is essential to auto OEMs and Tier 1 suppliers. It helps them detect any potential issues early and allows them to put in place alternative supply chain plans. While most North American assembly plants depend on China for some auto parts, most significantly wheels, brake and steering components, and electronics, many of these components could potentially be sourced in North America or other automotive supply markets. The greatest potential threat to North American assemblers is likely to be the supply of electronics components, since China dominates electronics manufacturing for the auto industry. While Wuhan, the epicenter of the virus, has a limited role in electronics manufacturing, it produces many of the capacitors used in electronic systems.

We don’t know at this point how badly the virus will damage the global auto supply chain, but it’s clear it will likely have a devastating effect on the auto industry.  While the coronavirus outbreak in China will not likely shut down many assembly plants in North America any time soon, the rapidly growing outbreak in the US may do just that. OEMs and suppliers alike have to balance every day whether to vacate areas in a plant where a virus outbreak occurred or to shut down the entire facility.

Auto suppliers should take steps to mitigate negative impacts. Below are five areas that suppliers can quickly begin to address:

  1. Ensure your employees are safe and know how to protect themselves. Institute sanitation rules in the workplace and relax rules about working from home, where possible and when needed. Ask employees who are sick to stay home until they are better. Eliminate non-essential travel. Ask office employees to work from home. Increase the spacing of your workers in the factories. Move production to all three shifts to reduce the number of employees that are in the plant at the same time.
  2. Improve your supply chain visibility and lines of communication, so you can detect potential problems early and work on remediation plans. If you don’t have digital supply chain transparency solutions already in place, you can create greater transparency through daily self-reporting with all critical suppliers.
  3. Proactively establish backup supply sources in North America or other supply regions for critical components and raw materials. In the current situation, there may still be time to find alternative sources and retool.
  4. Revisit your capital allocation and cash flow plans, since both are likely to be affected by a slowdown of vehicle demand and a downturn in the capital markets. Re-evaluate your expansion plans for China. If vehicle production declines in China by 20%, you may need to delay those capital projects and redeploy your capital elsewhere. The same needs to be analyzed for Europe and North America.
  5. Develop contingency plans for reprioritizing your products and customers that require components in short supply. Certain products may be much more critical to your customers than others.

Check out our latest thinking on how COVID-19 is affecting US businesses and our online, interactive COVID-19 Navigator.

©2020 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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