COVID-19 Impact on the Global Automotive Supply Chain Sector
For the past two years, the automotive industry has had to face challenges related to environmental, carbon dioxide mitigation requirements, technological adaption needs; hence, with the entry of the covid-19 pandemic, the industry has had a significant blow in its global supply chain. The automotive industry is a substantial backbone to other economic sectors. With the current automotive recession, the whole economy stands to experience ripple effects in all sectors. Governments worldwide are anticipating for a full spread of the virus, so is the automotive industry. Even though the virus is mitigated, its impact will incur the industry a lot of time and resources, before the business can be back to normal. The effects are a disruption in Asia’s auto exports, closure of major largescale manufacturers and assembly points. The pressure is too much for an industry experiencing a downshift in auto demand. This paper focuses on COVID-19 impact on the global automotive industry. It defines that the significant effects on the worldwide supply chain are reduction in vehicle demand caused by the closure of automotive equipment manufacturing (OEM) plants, and inaccessibility of raw materials due to failed logistics and delayed shipments.
Impact on Suppliers Operations
A survey done by IHS Markit concluded that about a third of automotive suppliers experienced moderate to severe effects due to the pandemic, and high-risk uncertainties among the auto-parts producers globally (2). The unexpected and rapid spread of the virus has left no automotive supply chain stable; instead, they are all grappling with unforeseen challenges. All this resulting from OEM, shutdowns, production output reduction, insufficient labour supply, and shortages in raw materials.
From the survey, half of the industries said that the pandemic produces a limited impact on daily operations, for instance, a slight decrease in output as a result of OEM demand reduction. The most resilience arose from Asia (Japan and China as significant players) whereby about 46 per cent of responding industries reported that they had the impact contained; on the other hand, Europe was most affected with 64 per cent reporting a severe pandemic effect (IHS Markit 3). Severity occurred with major plants been shut down following government regulations or employee reporting to be sick. North America, on the other spectrum, emerged to be moderate, with the impact lying between Asia’s and Europe’s. Asia was initially hit, with China suffering much since its major automotive companies had to stop, but it is slowly arising and containing the effect better than the latter affected. It is reported that most companies have resumed their daily activities.
Even though some suppliers emerge to be at a better position with the pandemic, the survey suggests that crucial concern is needed as the epidemic will impact the business outlook and chain. If one player is hit severely, then the whole chain is implicated. Sixty per cent of the suppliers reported that they are concerned or extremely concerned with the due alteration in the order of supply. With Europe reporting rapid pandemic cases, 83 per cent of respondents emerged to be very concerned. On a broader perspective, Europe hosts most of the globe’s automakers and assemblies, so the impact is spread across its major economy players.
With supply chain disruptions contributing to the automotive industry concerns by 23 per cent and ranking third, it is crucial to consider significant automotive stakeholders like employees and the financial sector (PWC). Labour significantly impacts the supply flow. The United States’ industry approximately employs a million staff. The number increases when Europe and Asia are combined. The pandemic has hit these major nations severely; as a result, most workers are either sick or under lockdown. The industry could be automated, but a more significant part of operations is mandated to humans. Reduced workforce translates to a production decline and further supply disruption.
Finances and liquidity in stabilize supply operations. The rapid pandemic spread coincided with most industries’ first-quarter causing considerable disruption in financial statement finalization and implementation. Also, there are concerns on major economic breakdown which will impair their long-term assets, receivables and liquidity functionalities. Significantly, most finance personnel are directly succumbing to the virus, so they are likely to redirect their focus from the business to survival measures. The supply chain irregularities could imply that operational cash is trapped in the economy, and the pandemic will delay retrieval procedures.
Focus on Major Automakers
With the spread hitting outstanding China suppliers, Hubei province, a major automotive production area, emerges as the COVID-19 epicentre; also, the effect has spread rapidly to other major European and American manufacturers. The three significant automakers report a severe reduction along with other competing counterparts across the globe. The pandemic has not affected their workforce, but also the market demand and supply. The deeper an automaker is in the supply chain, the more the impact it faces. In the supply chain, tier 2 and tier 3 automotive suppliers will be affected the most. With several automotive equipment manufacturers (OEM) having an instant connection to top-tier suppliers, the impact will flow rapidly to lower tiers. Most of them have had to extend their shutdown periods. At the end march, Ford automakers halted their European and North America operations to help in mitigating the pandemic. While the company had published to resume average production on the 30th, they had to push the shut down further until May 4. General Motors too suspended its production in North America. GM auto suppliers remain closed with only the output of ventilators and masks holding its supply department stable. Also, the Fiat Chrysler suspended its creation on March 18 but establishing that it will resume normality by May 4. Nissan suspended its UK operations following a disruption in supply chain and market demand. South African and European BMW plants remain suspended until the areas contain the spread. Other affected automakers with plants based all over the globe are Toyota, Renault, Honda, Daimler, and Volkswagen.
RBC Capital Markets reports that the pandemic and its rapid effects on market demand might reduce global automotive production and supply by 16%. At the same time, the reduction is accelerated by a 20 per cent reduction in the United States automotive sales. The features arose after the stock exchange provided a reduction in automotive shares with a decline of 30 to 40 per cent in a month. The U.S. Tesla stocks closed at the beginning of the week at 18.6 per cent. Ford and GM follow with the closure of public shares. RBC concluded that the 16 per cent decline arose from reduced demands, and China- major auto market-reducing its retail sales by half. The domino effect due to plant suspension and supply insufficiencies across the supply chain will cause a significant disruption that the industry might not recover quickly.
Impact on Spare Parts Supply
According to Detroit, China leads nations like Canada and Mexico when it comes to spare parts production. The United States imports close to 155.8 billion dollars’ worth of parts from China. With China facing a significant blow since last year December, America and other nations incur the aftermath of the pandemic. Even though China seems to be containing the virus’s impact, its operations function below standard capacities. As a result, the entire supply chain is disrupted right from the source. A Michigan Professor in supply chain management told the Detroit press that due to limited loads, the shipping cargoes had been suspended, and it might take a considerable time for the chain to be functional, despite the reopening of China’s operations.
Unlike automakers who stocked up for the next two months, local spare parts stations might not manage the impact considering the ongoing lockdown. Even if they manage to reopen, they might not serve other suppliers who depend on their services.
Government Contribution
Following the Great Recession, Governments played a vital role in mitigating the effects. Just like the COVID-19 has impacted the gross domestic product and employment, so did the recession. The United States government responded by providing fiscal stimulus programs that helped the Federal Reserve to enact federal fund policies that contained the economy’s inflation. Just like COVID-19 provides uncertainties, so did the recession on its onset. Most economies were able to bounce back because the government intervened; however, the automotive industry will need more than the government to get through the pandemic. In a few days, the government will enact Corona Virus relief funds. The efficiency of the funds will depend on how well companies will align their new strategies with the funds.
Recommendations to Improve the Industry
While the present pandemic situation seems unrecoverable, the industry will need to revisit its operation strategies and reconstruct survival models that will improve the current disaster.
Risk Management models: Automotive suppliers need to rethink their past strategies and implement new risk control strategies that will ensure business’ long-term continuity. The approach could involve diversification of supply chains by using a geographical business perspective, that aims at reducing risks, occurring due to some places reporting huge effects. Also, the companies need to broaden their source of suppliers by eliminating the dependency on monopoly suppliers and engaging with local or multi-sourced suppliers. Finally, adapt inventory systems that limit disruptions.
Readjust Financial Hedges: Suppliers need to establish cash management frameworks aimed at gathering due receivables and working capitals that are capable off exploiting the economic shock. Access capital placement and budgeting strategies and their effect on a company’s cash and liquidity. The industry should access its eligibility in receiving government relief funds that are meant to be enacted in a few weeks. The funds might offer relief in business administration and operations. Since the funds might be masked with stock buybacks, the industry needs to be careful in the implementation of the resource.
Cooperation between Supply Networks: A definite communication must be established between all level suppliers. Suppliers in Tier 1 need to promote discussions with basic Tier 2 participants since their operations and decisions directly affect the former suppliers. Time should be dedicated to discussing alternative strategies and plans that will help them operate efficiently despite the pandemic recession. The lockdown has caused a delay in suppliers-to-supplier delivery performance. Therefore, with overall coordination, they will jointly manage inventory at key supplier’s location, production timelines, and shipment status. Such measures will allow quick warning and critical suppliers will respond appropriately and maintain a stable supply chain. Companies that had not adopted the electronic system allowing for real-time information, materials, and product flow, should consider implementing the move; since it will increase material accessibility, better asset management, and performance. This pandemic should reveal how the automotive industry can quickly bounce back than the 2011 Japan automotive tsunami breakdown. Digitalized supply chain strategies will enable identification of issues sooner and enable quick remedies across the globe.
Adaption of Other Supply Sources: With most international airlines and sea travels suspended, parts and vehicle suppliers locked out; companies should quickly engage with other suppliers to maintain their operations inventory and production capacity. Although the alternatives might differ in expertise and distribution, the plan is worth implementing. Other than China, countries like Mexico, India, Brazil, and Chile could diversify the supply chain inclusively.
Adapting alternative sources is not enough; the suppliers should consider potential tax and legalities implicated by the supply chain disruptions. In acquiring alternative, considerations should account for customs, and transfer pricing.
Relevant Financial Projections: Recasting needed in business assumptions, business forecasts, business plans, and cash flows. The revision should be connected to the COVID-19 deflated automotive market, by considering the onset of worst scenarios if at all, the pandemic continues for months. Recasting in relations to the current market and OEM suspensions is vital in generating rational operation decisions. With the varying pandemic ramification, companies will need to set apart a team that will occasionally alter the projections to keep track of the pandemic.
Labour management: Transparent communication with employees is crucial in maintaining a sound and healthy activities. The interface will enable the workers to realize that their dedication is worthwhile since the company involves them in information transactions. With the government-inflicted lockdown, most employees will result in remote working. Therefore, they will need to be informed and equipped appropriately on how to work. A learning curve is probable, but with the right guidance, they will efficiently deliver as per the newly constructed strategies. Investment on cybersecurity should be a priority to deal with remote resilient systems and harmful operation activities efficiently. Finally, for on-site staffs, the company should put measures that protect them the risk of the pandemic.
In conclusion, the question of how long the pandemic might dominate is still uncertain. Suppliers state that the epidemic reduces the visibility of a future that most plants will resume normality, as much as it is increasing the supply chain disruption. This is a call of action to all suppliers to access their operations and mitigate new plans that will enable survival operationality, despite the deflating economy. Precise scenario strategizing is vital: Consideration should not only lie in accessing the addressed issues but also a broader account into the deflating economy and financial sector. The response should focus on improving production, accounting for reduced consumer demand, as well as government input. If the automotive fails to recover, then the whole economy will continually suffer; hence, the industry participants need to maintain agility to surpass the future uncertainties.
Works Cited
Detroit Press. “Understanding COVID-19’s Impact on the Automotive Sector | Deloitte Global.” Deloitte, 1 Apr. 2020, www2.deloitte.com/global/en/pages/about-deloitte/articles/covid-19/understanding-covid-19-s-impact-on-the-automotive-sector.html. Accessed 2 May 2020.
IHS Markit. COVID-19 Pandemic Impact on Automotive Suppliers. 27 Mar. 2020. ihsmarkit.com/research-analysis/covid19-pandemic-impact-on-automotive-suppliers.html. Accessed 1 May 2020.
Rich, Robert. “The Great Recession.” Federal Reserve History, 22 Nov. 2013, www.federalreservehistory.org/essays/great_recession_of_200709. Accessed 2 May 2020.
Sorensen, Jeff, and R. Telang. “COVID-19 and the Automotive Industry.” PwC, 2020, www.pwc.com/us/en/library/covid-19/coronavirus-impacts-automotive.html. Accessed 2 May 2020.
Wayland, Michael. “RBC Warns Coronavirus Could Cause 20% Decline in US Vehicle Sales As Auto Stocks Tank.” CNBC, 16 Mar. 2020, www.cnbc.com/2020/03/16/rbc-warns-coronavirus-could-cause-20percent-decline-in-us-vehicle-sales.html.