Inadequate backup plans and limited supply chains have put the automotive industry in an especially tenuous position for surviving the ongoing coronavirus outbreak, according to two analysts studying the situation. Should the situation extend close to the first day of Spring, the effects of that lack of preparedness could become especially acute.
The virus, first discovered in Wuhan, China on Dec. 31, 2019 has already killed 2,129 people as of Feb. 20 according to the World Health Organization. All but three of those deaths are in China, but the coronavirus has been detected in people in 27 countries. The outbreak has caused automakers and suppliers to curtail or cease production in China and South Korea due to a lack of parts and the desire to minimize the possibility of passing it along from interpersonal contact.
China accounts for more than $40 billion in auto parts production, with almost $20 billion to U.S. or U.S.-based companies, according to Razat Gaurav, CEO of Ann Arbor, MI -based Llamasoft, which uses data to advise automakers and suppliers on supply chain strategies. Among its clients are General Motors Corp., Ford Motor Co., and tire manufacturer Bridgestone Corp.
“Come mid-March, if we’re still in the same boat, there’s going to create shortages in a wide range of industries,” said Gaurav in a phone interview.
BDO USA, a leading accounting and business services firm, surveyed 100 CFO’s at manufacturing clients with revenues of $250 million to $3 billion as part of its Manufacturing CFO Outlook Survey. That survey revealed 21% of those companies reported supply chain disruptions for a number of reasons, including the coronavirus.
“What our clients are learning is that they’re not as prepared as they could or should be,” said Jeffrey Pratt, Supply Chain leader at BDO, in a phone interview. “What we’re learning is not only as a result of coronavirus, but also some of the trade and tariff wars, having so much supply concentrated with suppliers in China and not being so geographically dispersed. That’s sort of been a longer-term effort that started with the trade wars and it’s almost exacerbated by the coronavirus.”
For the auto industry, such preparedness can be especially challenging because of the nature of the business, including short lead times for incoming parts and components due to the long-standing strategy of just-in-time delivery to assembly plants in order to minimize stockpiling inventories.
While most companies have what Gaurav calls “buffer” inventories to tide them for short disruptions, within the next month those backup supplies could run dry. The result, he predicts, is a reconsideration of priorities.
“It is really going to force them to consider tradeoffs between operating on that lean principle and carrying some of that buffer inventory you need during unfortunate situations like this. Those are not very straightforward decisions,” he said.
The other challenge for automakers in casting a wider net for backup suppliers is the competitive nature of the business, points out BDO’s Jeffrey Pratt, explaining, “part of the limitation in industries like automotive is the investment and sharing of design information, and certification of the suppliers—you know it’s a pretty big investment—I think maybe that’s the reason there hasn’t been as much of that in automotive.”
In some cases, the backup suppliers used by automakers operating in China are also located in that country. That may be an effective strategy to overcome a local situation, such as flooding or an earthquake, but not a widespread viral epidemic, warns Llamasoft’s Razat Gaurav.
“As companies rethink the design structure of the supply chain, factoring these sorts of risks will become more important,” said Gaurav. “I think companies will invest a lot more in contingency planning. The problem is no one knows the cost of not having a well-thought out contingency plan for a catastrophic situation.”
The coronavirus outbreak will end at some point, begging the question, how long is it likely to take for the auto industry to bounce back to some semblance of normalcy? BDO’s Jeff Pratt predicts, “it may take a quarter for things to get back to normal.”
But the impact of the coronavirus outbreak is likely to lead to a new normal...one where automakers, suppliers, and other industries that weren’t adequately prepared for this catastrophe, will need to devise a solid Plan B for the next one.
Written by: Ed Garsten, Author, for Forbes.