By Lori Murray
The virus, first discovered in Wuhan, China on Dec. 31, 2019 has already killed 2,669 people as of Feb. 24 according to the World Health Organization. All but three of those deaths have occurred in China, however, the coronavirus has been reported 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. This outbreak could have a significant impact on freight volume entering the United States from China and has already caused over a 3% dip in the Dow Jones Industrial Average and the S&P 500 index, wiping out all gains for the year.
The extent of the virus’ impact on the supply chain is still unknown, but experts say the normally soft first quarter for Chinese imports to the U.S. will be even softer this year. According to a report from Brian S. Wesbury , Chief Economist and Robert Stein, CFA – Deputy Chief Economist, “The real question , form a macroeconomic point of view, is how will this impact the US economy over the coming year? The US we believe is relatively insulated, with a fantastic health system. The US started the year with solid economic data and so far, nothing has changed. In fact, with all the data we already have on hand, we are expecting around 2% growth in Q1. Most of the impact to the US from the corona virus will come in Q2.”
Wuhan, in China’s Hubei Province, is a major industrial and transport hub in central China along the Yangtze River. According to a report from DHL’s Resilience360,the city, known as China’s “motor city,” the report states, due to a large manufacturing presence of domestic and foreign car makers and global auto parts suppliers..
One factor that is still unknown, says Neel Jones Shah, executive vice president and global head of airfreight for Flexport, is once Chinese factories do reopen for production, how many workers will come back to work from their hometowns? After a typical Lunar New Year holiday, (which occurred Feb 15-21 this year) about 10-15% of workers don’t come back to work for various reasons, says Shah. With the virus outbreak, he says more workers could decide to stay home in a safer environment, further delaying production getting back up to speed at factories.
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. “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.
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 industries like automotive is the investment and sharing of design information, 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 sort 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, to devise a solid Plan B for the next one.