The 2020 COVID-19 pandemic caused significant headaches for virtually everyone, but perhaps no one was impacted more than the United States auto industry. It’s considered the largest manufacturing operation in the nation, accounting for roughly 3% of domestic national product (DNP). With more than 4 million employees, according to the Bureau of Labor Statistics, this is an industry where COVID-19 continues to have a significant impact.
Parts suppliers located throughout the world have also been forced to shut down or curtail production, making securing a sufficient quantity of parts a major industry-wide problem. According to an IHS Markit survey, nearly 39% of suppliers surveyed have had at least one or more plants directly impacted by COVID-19, as employees were found to be infected by the virus. It's estimated that the top 20 original equipment manufacturers (OEMs) in the global auto sector will see profits decline by approximately $100 billion in 2020, roughly a 6% decrease from just two years ago. It will likely take years to recover from this plunge in profitability.
Although COVID-19 made the vulnerabilities in the automotive supply chain more prominent, these vulnerabilities existed before the global pandemic. Here are the long-term impacts the automotive supply chain should be aware of.
Long-Term Impacts of COVID-19 on the Automotive Supply Chain
The spread of the virus varies country by country. The virus’s impact on the supply chain comes in the form of logistical issues, raw material shortages and single-site manufacturing.
As the virus spreads, these impacts have been—and will most likely continue to be—delayed experiences. Suppliers in one country often felt the impact of closures to manufacturing plants in another country weeks later. Border restrictions, plant closures and personal lockdowns instituted to control the virus spread have resulted in loss of revenue that manufacturers are still making up for. Many have experienced a hit to liquid assets.
These factors make understanding and anticipating the following impacts crucial to your business’s bottom line.
Raw Material Shortages
Shortly after COVID-19 became a global pandemic, 40% of suppliers experienced raw material shortages. Because of the reduced capacity caused by this shortage, raw materials—especially steel and microchips—are now sold for a higher price to meet the customer demand and make up for loss of revenue from closures early on. The wait time for these materials has also increased from weeks to months, making it difficult for manufacturers to meet the customer demand.
The raw material shortage has also caused manufacturers to contend with the impact of Section 2-615 of the Uniform Commercial Code. This code allows suppliers of goods to declare commercial impracticability, so they can adjust terms of a contract and to instead allocate limited material to a wider net of manufacturers.
Updates to Contract Language
Force majeure claims, which relieve a party from contractual obligations in the occurrence of an unforeseen event, have historically been a templated addition to the contract that neither party paid much attention to. Because of the significance of the global pandemic, parties involved in the automotive supply chain need to develop a greater understanding of their supply chain location and the potential risks to operations in the case COVID-19-related events.
Declining sales and increasing costs have caused liquidity loss for many OEMs. One of the ways OEMs have attempted to improve financial setbacks is through pursuing suppliers on warranty claims. Historically, companies have tried to avoid the hassle of these claims, but businesses are turning to solutions that may not have been considered prior to the pandemic.
Warranty sections of contracts, which are often written to be very broad, now need to include more specific language related to supply specifications and responsibility of part failure in the field.
Need to Diversify Supply Chains
The global pandemic revealed the many drawbacks to reliance on a single supplier and manufacturer. For many countries, this source is China. The U.S. is especially vulnerable to disruptions to China’s export of vehicle parts and accessories. As we have learned, no country is invulnerable to reduced delivery times, plant closures and material shortages, all of which have dominated over the past year.
China accounts for 60% of global consumer goods exports, and while it is unlikely that manufacturers will abandon this resource completely, implementing dual-sourcing strategies is the solution. Considerations for alternatives should include:
- Cost of materials
- Property prices
- Labor costs
- Labor regulations
- Intellectual property (IP) protections
More and more, companies find these qualifications and tax benefits in Southeast Asian countries.
Establish a Trusted Relationship With an OEM With Thought Leadership
Valuable lessons can be learned from 2020. One of the most important lessons is avoiding some logistical issues by diversifying your sourcing strategies.
When your company establishes and maintains a close partnership with an OEM supplier, that OEM doesn’t just provide a secure supply of critical parts and materials. They can also provide thought leadership and advice to help ensure any disruptions have a minimum impact on your company operations.