Unless the North American auto industry begins now to plan and coordinate the restart of factory production in the weeks or months ahead, it could find broken supply lines and a frustrating series of shortages.
The real-world worries now being expressed by some executives and consultants include suppliers with too little cash to pay for manufacturing restarts, a tussle over limited raw materials, the absence of smaller Tier 2 and Tier 3 companies because of insolvencies and even the disappearance of myriad regional trucking companies relied on to keep industry manufacturing chains linked together.
“You’re talking about starting up 50 or so major auto plants at the same time,” said Dietmar Ostermann, U.S. automotive advisory leader at PwC, who is working with auto companies across the continent. “Going from zero back to 100 [percent], all at once. That’s never been done.
“Consider what happens just in the normal course of a model launch — how many supply chain hiccups and problems and delays,” he added. “And then consider that almost every auto plant has more than one line and multiple models. It will be that times 50.
“It could be bloody.”
One solution would be to bring industry leaders together — now — to coordinate a measured return to full production, suggests former Ford Motor Co. CEO Mark Fields, now working with both suppliers and logistics clients as senior adviser with the private capital firm TPG Capital.
“The issue is going to be probably between 30 and 60 days from now,” he warned in a podcast with Automotive News last week.
“Every supplier is going to be facing a cash crunch because they’re the ones who are going to have to front the labor, [be] buying the material, paying for the logistics to bring up their assembly lines.”
The idea of a coordinated reboot appears to be gathering steam.
Julie Fream, CEO of the Original Equipment Suppliers Association, said last week her organization has approached U.S. Trade Representative Robert Lighthizer and U.S. Secretary of Commerce Wilbur Ross with a letter asking them to consider having those discussions.
Because of antitrust laws, such industrywide production planning could not be orchestrated by competing companies, Fream noted.
“If that was possible and [the Trump administration] wanted the industry to come together to have that dialogue, I’m sure they would,” she said.
“But it’s got to be supported at the federal government level before we even think about how we would do that.”
Running out of cash is only one piece of the challenge, observers say. The bigger problems for an industry accustomed to smoothly flowing production and reliable schedules will be operational. Among them:
- Missing players: PwC estimates at least 12 large U.S. suppliers were already facing financial discomfort as 2020 started, simply because of last year’s extended UAW strike against General Motors and a slowdown in business in the otherwise lucrative China market — all before the COVID-19 pandemic.
Now, Ostermann said, without disclosing the specific companies PwC is consulting, other suppliers — especially smaller companies — are going to find themselves in financial distress and possibly going belly up. If they do, their absence will be an added burden for automakers eagerly trying to fire up production.
- Logistics breakdown: Another potential bottleneck, Ostermann predicted, will be trucking companies.
“Many of them won’t be around,” he said. “A $5 billion auto supplier in America works with 50 to 100 inbound carriers. Some of these carriers may be big, but many of them are small businesses just running one to 100 trucks.
“They’re not sitting around waiting for the auto industry to come back — some of them are out moving groceries and medical supplies now, I predict. And some of them will simply go out of business in the coming weeks for lack of cash.”
- Health precautions: The restart of the auto companies will mean the return to work of some 664,000 furloughed U.S. workers, according to estimates by the Center for Automotive Research in Ann Arbor, Mich. When that happens, virus infections might still be occurring at some reduced rate.
That will require employers to implement new procedures and tools for workplace social distancing, probably even redesigning production lines and work cells to keep people farther apart. Because most of the manufacturing industry is currently on furlough, those engineering and layout measures are not yet being implemented.
Last week, the seating and electronics supplier Lear Corp., which has 165,000 employees around the world, publicly distributed a 51-page document called the “Safe Work Playbook,” which spelled out its plans to implement new safeguards.
Lear said social distancing in plants will require its workers to be 3 to 6 feet apart. And “where a minimum distance cannot be maintained due to workplace design, one or more mitigation strategies need to be implemented,” it said, “including engineering, PPE and/or administrative controls as appropriate.” Work areas will be disinfected between shifts, shift times will be staggered to keep workers apart and cubicles will be separated or partitioned to keep office personnel at acceptable distances, the plan states.
Punching a plant’s time clock, it says, can no longer be done with bare hands. And each time the clock is punched, it must be wiped down.
The Original Equipment Suppliers Association and the Alliance for Automotive Innovation also produced health and safety guidelines for suppliers to consider while ramping production back up. The guidelines were drafted with input from all U.S. automakers except Tesla, as well as suppliers Lear, Aptiv and Magna International.
- Competition for materials: Auto plants and parts factories are not the only industrial sector on pandemic-related hiatus. Steel mills, aluminum foundries and the rest of the raw-material supply chain are at reduced production levels. The auto-steel giant ArcelorMittal turned down the spigot for much of its production last month in Europe. Similarly, U.S. Steel is idling steelmaking operations at Great Lakes Works outside of Detroit.
In the next month or two, when the industrial grid begins to turn back on, the ramp-up of material producers could leave the industry with tight supplies, sparking higher-than-normal prices. It is likely some customers will not receive all the material they need when they want it.
- Competition for priority: A tight supply of parts could be another industrywide phenomenon as suppliers return to normal production. As they ramp back up, some suppliers will have to decide which customer will receive parts first. It is not uncommon for a single supplier plant to produce parts for competing automakers and competing vehicle models.
Picking and choosing who gets served first is likely to strain automaker-supplier relations.
- The Mexico wild card: Mexico has largely been absent from the 24/7 news about the COVID-19 pandemic. As of late last week, despite a population of 126 million, Mexico had reported fewer coronavirus cases than Saudi Arabia, a nation with less than a third the number of people.
But should the pandemic take hold of Mexico as it did its northern neighbor, there could be profound implications for U.S. auto production. Chinese exports of auto parts to the U.S. reached $15 billion in 2018, and the coronavirus-related halt in Chinese parts imports at the start of this year wreaked havoc with some U.S. vehicle supply lines.
A similar halt in imports from Mexico in the coming weeks would be even more disruptive: Mexican factories export almost $60 billion in auto parts annually to U.S. customers.
Alexa St. John contributed to this report.