The New Normal in the Automotive Supply Chain

By Daron Gifford, Partner and Automotive Consulting Leader, Plante Moran

WHILE COVID-19 HAS DISRUPTED THE AUTO SUPPLY CHAIN, IT HAS CREATED NEW OPPORTUNITIES TO ESTABLISH A STRONGER U.S. FOOTPRINT, UTILIZING AUTOMATION AND OTHER NEW TECHNOLOGIES.

or immediate evidence of disruptions in the automotive supply chain, you need to look no further than your local dealer. Many lots are nearly empty of new vehicles, with average dealer inventories across the U.S. far below the normal 50–60 days’ supply. How did this happen? Of course, the COVID-19 pandemic is a major part of the problem. When automotive production was abruptly halted in March, there were not any new vehicles being produced until early May. Even then, production has been proceeding in fits and starts. At the same time, consumers have continued to purchase vehicles, keeping auto demand surprisingly strong in an uncertain economy.

OEM assembly lines have been attempting to move up to full production, but most are not there yet. While some blame it on productivity problems from social distancing, lack of labor available to come back to work, or line shutdowns due to coronavirus infections, the key culprit has been the automotive supply chain. As suppliers have been trying to ramp up, they have been hamstrung by their own designed global supply chains. Part volumes coming from Asia, especially China, are still recovering to prior levels. Trade disputes with China have not helped. And other closer countries, such as Mexico, continue to struggle with infection levels and manufacturing shutdowns on a daily basis.

The global supply chain can no longer meet demand, exposing structural flaws in the automotive industry’s supply chain that will not be easily resolved and returned to a “normal” state in the COVID-19 world.

GLOBAL INSTABILITIES

Just since the turn of the 21st century, the U.S. economy has been disrupted by two major events that created catastrophes to the business world — 9/11 and the Great Recession of 2008–2009. The COVID-19 pandemic has been another economic crisis; however, it has been dramatically different. The extreme impacts to economies around the world liken it closer to World War II. Virtually every country has felt the residual effects ranging from complete lockdowns to frightened citizens who have been displaced by economic retractions.

Trade policy disfunctions have also come into play. U.S. and China relations are at a new low point. Tariffs on steel, aluminum, and other products continue to be in force, and technology disagreements such as TikTok and Huawei are in the headlines daily. There is very little that can be predictable about trade in the near or long term.

Combine these current global manufacturing challenges with “lean” supply chains developed over several decades, and you find an auto industry unable to function efficiently or come back quickly. Uncertainty about

consumer demand going forward provides even production employees. more instability to vehicle production schedules Yet, there may be some hope for the forwardupon which suppliers depend. The concepts looking auto supplier. More automation, robotics, of lean manufacturing thrive when production and new technologies will need to be used in can be level, stable, and smooth. In that type of the production lines. Automation will eventually environment, inventories can be just-in-time and make for better, higher-quality products, while production moves ahead like clockwork. also supporting productivity improvements needed

COVID-19 has shown how defenseless the in the work force due to coronavirus production global supply chain can become in the face of inchanges. Capital investment — be it through new terruptions, catastrophe, and crisis. Though fixing production plants and equipment, or by purchasit rapidly and in the middle of coming back from COVID-19 HAS ing weaker competitors — will allow the strongest pandemic problems is a daunting task, an alterSHOWN HOW suppliers to grow and grab volume and market native which must be considered lies in returning DEFENSELESS THE share. While COVID-19 may have left the indusat least some automotive production capacity to GLOBAL SUPPLY try in disarray, it’s created a prime opportunity to U.S. shores — not so much vehicle assembly, but CHAIN CAN expand the business and establish a stronger U.S. the critical auto components needed to produce BECOME IN footprint. a functioning car, SUV, or truck. THE FACE OF INTERRUPTIONS, MAPPING OUT YOUR PLAN THE CASE FOR AMERICAN-MADE CATASTROPHE, The coronavirus is not likely to go away for a

The advantages of increased U.S. auto parts AND CRISIS. very long time. There is no cure today, testing is production are obvious. It would tighten what’s still inconsistent, and while vaccines look promisbecome a far-flung global supply chain, weaning ing, they are a long way from full production in automakers of dependence on foreign suppliers volumes that will have a significant impact. Hot and offering a leaner, faster route to reducing the spots of infection will probably continue to pop cost of stockpiling inventory as a contingency plan. up and disrupt production operations over the

It’s also beginning to make more economic next 12 months and beyond. At Plante Moran, sense. The global supply chain as a whole is only we have helped our clients in critical planning for getting more expensive. China has been the lowtheir supply chains, focusing on key activities in cost country of choice for years. However, their three phases: cost of production is increasing and likely to increase even more in an inwardly focused COVID-19 world. Other countries 1 Respond: Manage through the current crisis. may be alternatives, such as Vietnam or Thailand; however, the 2. Restart: Plan to reinitiate business operations. supply chain from Asia is still long. 3. Plan: Build readiness for the next disruption.

Mexico is a solution closer to home and supported by the recent USMCA trade agreement to require more auto Building readiness for the next disruption will require production in North America. But COVID-19 continues to investment and planning out a new strategy for your global haunt Mexico auto production, with high infection rates and supply chain. While you cannot foresee everything in the fuproduction line shutdowns. The low labor cost advantage ture, suppliers need to have a structured plan and capability, historically enjoyed by Mexico will be reduced now, according including decision processes that can be flexible with events. to USMCA terms, which will require higher direct labor wages COVID-19 was truly a Black Swan event; really no one for Mexican workers. saw it coming, even though many thought it was highly

Still, U.S.-based auto manufacturing faces obstacles of likely to occur. Scientists have long predicted a pandemic, its own, beginning with the capital investment needed in but the rest of the world did not worry much. Major disrupnew plants, new tooling, and new equipment. Perhaps even tions don’t happen often, and in the meantime, our attenmore challenging is the lack of manufacturing labor across tion typically goes to the immediate crisis at hand. Planning the country. With unemployment still at record levels, you for readiness in your supply chain has not received much would think that there should be plenty of workers available. credibility — until now. But despite years of headlines calling for the rebuilding of U.S. manufacturing, factory work still carries a stigma among American workers, leaving the country too light in skilled Continued on page 15