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Impact of COVID-19 On The Automotive Manufacturing Supply Chain

Impact of COVID-19 On The Automotive Manufacturing Supply Chain

Impact of COVID-19 On The Automotive Manufacturing Supply Chain

The COVID-19 pandemic is causing massive supply chain shocks, and the automotive industry is not spared. How can automakers build a resilient supply chain in times of crisis? Article by Katherine So.

The coronavirus (COVID-19) outbreak continues to headline the news every day, with reports citing its alarming levels of spread and the resulting widespread panic as the world grapples to contain it. However, its impacts are also rippling through industries including the automotive sector. This evolving crisis is creating a domino effect downstream and disrupting normal operations of the manufacturing supply chain. Moody’s Investor Service slashed its global vehicle sales forecast to a 2.5 percent fall in 2020 instead of the previously predicted 0.9 percent drop compared to 2019 due to the virus.

READ: Auto Sector Faces Biggest Existential Crisis Since 2007-09

Supply Chain Disruptions

China is the world’s largest automotive market and Wuhan, the epicentre of the outbreak, is one of the major auto-industry hubs in the country. This “motor city” is home to seven major domestic and foreign auto manufacturers, including Honda, Nissan, Peugeot Group, as well as hundreds of auto parts suppliers. In 2019, the province produced 2.24 million units, accounting for 10 percent of China’s car manufacturing capacity, according to China Passenger Car Association (CPCA), and exported US$60 billion worth of auto parts. Moreover, 80 percent of car production worldwide involves Chinese parts. 

READ: Coronavirus Outbreak Reveals the Weakest Links In The Supply Chain

Many auto companies across China halted production during the nationwide shutdown to keep their employees at home. This includes Nissan, Honda Motor and PSA Peugeot Citroen and Tesla, which postponed production of its new models in its new facility. As the supply chain is greatly integrated, disruptions in any part of the supply chain can impact the regional market. In this case, the shortage of auto parts from China have resulted in closing of Hyundai’s manufacturing facility in Korea. 

“Carmakers will face severe parts-supply issues, something companies didn’t encounter during the SARS period,” said Cui Dongshu, secretary general of China’s Passenger Car Association. “Wuhan is the most cost competitive among China’s car-industry hubs, therefore many parts makers produce components there and supply their clients around the world.”

According to IHS Markit, this slowing of operations and facility shutdowns until mid-March due to the virus can lead to a reduction of 1.7 million vehicle production in China. Furthermore, car sales in China has dropped 92 percent in first half of February, according to CPCA.

READ: Bosch Cutbacks Operations In Response To Falling Automotive Demand

Recently, manufacturing facilities in China such as those of Volkswagen and Nissan have started to resume partial production and are still struggling to regain full capacity. However, as the outbreak morphs into a global pandemic, the automotive market is hit with yet another wave of threat in Europe and the US. Fiat Chrysler and Ferrari are closing its plants in Italy; BMW, Toyota and Honda are shutting its UK facilities temporarily; Ford and General Motors are shutting factories in the US; while other automakers like Jaguar Land Rover and Peugeot are ramping up efforts to deal with infections among workers. 

According to Globaldata, shutdown of vehicle plants in Europe would cause the removal of over 1.3 million vehicles from production, in turn costing the European auto industry a GBP29.3 billion loss in revenues. Similarly, IHS anticipates a drop of US car sales to 15.4 million vehicles compared to 16.5 million in 2019. The crisis has left manufacturers scrambling to find alternative solutions and source for different suppliers to prevent shortages. 

READ: Siemens Connects Healthcare Providers And Medical Designers To Produce Components Through AM

Impact In ASEAN

The ASEAN automotive market is expected to face another challenging year. “The automotive industry has a very integrated supply chain. Therefore, any disruption in the global automotive supply chain will impact every regional market including ASEAN—either by less sales of cars or because of shortage of parts necessary for the production of cars,” commented Rodrigo Cambiaghi, EY Asia-Pacific and Greater China Supply Chain and Operations Leader. 

The Vietnam Ministry of Industry and Trade has forecast that most automakers will experience partial shortages during this time of crisis and sourcing from other markets would be difficult due to familiarity of technical standards of Chinese parts. As a consequence, Vietnam’s industrial production growth could drop 2.3 percent due to reduced imports of parts from China, according to management fund VinaCapital. 

READ: Ford & Toyota—First Automakers To Suspend Production In Vietnam Due To Covid19

Thailand, as one of the largest exporters of vehicles in Asia will not be spared as well. Toyota Motor Thailand predicts that sale of domestic vehicles will drop 6.7 percent to 940,000 units in 2020. Despite this, the Thailand Government has drawn a plan to transform Thailand into a regional hub for electric vehicles by 2025 and has put various strategies in place to promote production and development of EVs.  

Malaysia has also recently launched its National Automotive Policy (NAP) 2020, which incorporates three new advanced technology elements—Next Generation Vehicle, Mobility as a Service and Industry Revolution 4.0 and focuses on three strategies—for value chain development, human capital development as well as safety, environment and consumerism. Some vehicle manufacturers, especially Chinese car companies, were affected by the outbreak, however, Malaysian Automotive Association (MAA) president Datuk Aishah Ahmad said that the total industry volume (TIV) forecast for 2020 will remain the same for now. 

The current COVID-19 situation is still unfolding and the market is fluid. Amid the gloomy outlook, the situation is expected to improve by the second half of the year, according to Fitch Solutions, as countries have sufficient capacity and infrastructure to ramp up output quickly. Moreover, with growth opportunities in ASEAN’s automotive markets, vehicle sales are forecasted to grow 3.5 percent in 2020. In the meantime, what can manufacturers do to mitigate the risks?

Building A Resilient Supply Chain

Rodrigo Cambiaghi

Based on the developments from this pandemic, coupled with learnings from past disruptive instances, Rodrigo Cambiaghi, EY Asia-Pacific and Greater China Supply Chain and Operations Leader shares the key pillars to help companies build a resilient supply chain:

READ: COVID-19 Forces Companies To Evaluate How They Operate And Embrace Technological Investment

  1. Conduct end-to-end supply chain risk assessments and prioritise critical focus areas
    • In the short term, responsiveness and speed are everything. Proactively engage supply chain ecosystem partners, such as suppliers and logistics service providers (LSP), to conduct a risk health check:
      1. Identify – changing demand and inventory levels to locate critical gaps in supply, production capacity, warehousing and transportation
      2. Define – common goals and an actionable short-term and outcome-driven resilience strategy with breakdown activities among the supply chain ecosystem, aiming to effectively and efficiently leverage additional networks among various suppliers’ pool, production and distribution networks.
      3. Deploy – Leading companies build action plans based on scenario analyses to limit the impact of disasters. A fact-based dashboard, including aligned key KPIs help to create enterprise-wide and ecosystem visibility. This can help a company dynamically re-prioritise its plans as needed.
  1. Develop a robust risk management process and diversify supplier network
    • Enterprises should map out supply chain networks from end consumers to tier-N suppliers. For each supply chain node/arc-like channel, warehouse, factory, supplier, or transportation mode, firms should establish a methodology to measure risk.
  2. Implement digital and automated manufacturing capabilities paired with strong manufacturing excellence
    • Leverage automation and IoT solutions for smart manufacturing operations to mitigate reliance on labor intensive processes. A strong manufacturing excellence program enabled by digital technology can allow standardisation of daily work and job aids, relieving the pressure of relying on specific individuals to make an operation perform. IoT capabilities can help foster a digital ecosystem of connected systems providing users relevant and updated data to make the most informed decision at any given time. Automated manufacturing capabilities will enable a company to run a manufacturing operation using interchangeable personnel and reduces labor requirements.
  3. Evaluate and adjust procurement category strategic priorities
    • Transform procurement into a value generation function via timely reviews and adjust category strategic priorities to define new business relationships with suppliers to meet the company’s overall supply chain objectives. An agile procurement operations system enabled by various technologies and factoring category strategic priorities across variables such as cost, quality, delivery, innovation, etc. will also help drive resiliency. Companies can introduce digital procurement technology to benefit from supplier social networks. Implementing a supplier social network in sourcing and supplier lifecycle management can strengthen sourcing capability and supplier collaboration in challenging circumstances.
  4. Invest in more collaborative and agile planning and fulfillment capabilities
    • The art-of-possible today in technologies that can bring more agility and collaboration within the enterprise as well as across business partners are endless. From IoT devices for demand sensing and goods movement tracking to advanced forecasting solutions and social medial demand behavior monitoring are heavily impacting how companies understand demand signals and how quickly they can react to them. These capabilities are extremely important for business performance even in normal business conditions and they increase the supply chain resilience in pandemic events like the coronavirus outbreak we are living today.
    • The current COVID-19 pandemic has caused disruption through all sectors with various degrees of impact. It is time for companies to rapidly assess, recover, and respond quickly through numerous obstacles and challenges that still stand in the way. Through the chaos of recovery, it will be very easy to overlook the root cause and gaps within a supply chain that may have paralysed businesses during this unpredictable major event in the first place. Building towards a resilient supply chain will be at the epicentre of future discussions for years to come.

 

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