The state of supply chains: Automotive, part 1 – revving up ready for the post-pandemic
COVID-19 cut capacity and now the race is on to restore supplies as demand builds back up
It’s going to be challenging bringing automotive supply chains back up to the required speed in 2021 given the numerous capacity crunches currently ongoing. This is the message from experts positioned around automotive supply chains who spoke to Reuters Events, Supply Chain. The sector is seeing the rapid return of demand in 2021 even as an out-of-sync global production and transportation set-up continues to throw spanners into the works.
These are wide ranging - from shortages of key materials, to supplier vulnerabilities, to lockdowns affecting global production centres, to disruptions in transportation networks.
However, with demand returning and Original Equipment Manufacturers (OEMs) charging back to meet it, the race is on and supporting supply chains are fighting hard to overcome the complications and capacity shortfalls.
The big shortages
This is a challenging time to be part of automotive supply chains, as the issues are coming from multiple angles. Of these, the biggest are shortages in a variety of key materials and components, that have caused production lines to grind to a halt in several cases.
To understand why, we have to go back to the beginning of COVID-19’s spread across the globe.
“From March time of last year, when the COVID pandemic was really, really biting, a number of operations effectively ground to a halt,” explains Murray Goodrick, VP Business Development - Manufacturing Logistics at DHL Supply Chain.
As volumes went up in the short term and continued to go up, it placed, I would say, significant stress on the complete supply chain. Some may say it's a perfect storm
As the depth and severity of the situation became clear “We had a lot of companies reducing inventory [as they weren’t] sure of what was going to happen, conserving cash,” says Craig Price, Senior Vice President - Global Purchasing & Supplier Development for Dana Incorporated, a major US-based supplier of automotive parts.
“Then there were multiple restarts and then close down points throughout all of all of last year,” across automotive supply chains notes Goodrick. With the “the vast majority of production capacity massively down … due to COVID,” ramping would become a huge challenge.
Demand always comes back stronger than the supply base can really ramp up, so capacity has been a huge, huge issue
That takes us up to this year, where “As volumes went up in the short term and continued to go up, it placed, I would say, significant stress on the complete supply chain. Some may say it's a perfect storm,” believes Price.
Marco Caputo, Vice President Global Supply Chain Management for BorgWarner, an automotive supplier with operations around the globe, echoes this sentiment. “Obviously there's no part of the world that's been untouched by the COVID issue,” which exacerbates the issues as “demand always comes back stronger than the supply base can really ramp up, so capacity has been a huge, huge issue.”
The sector is therefore wrestling with a wide range of shortages, stretching across different aspects of their supply chain. Price notes that “The availability of steel right now is a challenge,” as is obtaining chemical-based products “in a timely manner”.
Caputo is seeing the same thing, with plastic resins and steel running short enough “To put some stress into the system where you're no longer dealing with healthy pipelines,” but “maybe not to the level of the shortages we've seen in the semiconductors,” which is the greatest bottleneck for the industry right now.
We're probably not going to see the capacity really come back, or ramp up to a level that will relieve the shortage, probably until the middle of the year
“Our semiconductor supplies are struggling to meet demand,” he warns “because these wafers go into every chip, regardless if they are used in an airplane, a child's toy, a computer, or a car, and the demand’s resurging in all industries. So, it's not just an automotive problem, but we've seen, I think, the biggest impact around automotive,” as some “have had to idle plants,” and put in “unscheduled down days because they're struggling to get the volume.”
Casualties to this shortage include most of the biggest names in automotive, including Ford, GM, Honda and Nissan, with IHS Markit estimating that net effect could impact the production of 672,000 light vehicles in the first quarter, although this would ease and be recovered across the year.
Caputo has a similar feeling: “We're probably not going to see the capacity really come back, or ramp up to a level that will relieve the shortage, probably until the middle of the year,” although the knock-ons could well be felt “up to Q3.”
Out of sync
“I think the big difference between the capacity hits that we're seeing now versus when we came out of the 2008 crisis is the layer of complexity that COVID put on it,” says Caputo. “With rolling quarantines and lockdowns in different parts of the worlds, our suppliers are struggling to get the people back. We're seeing big impact from labour shortages, particularly in areas that are hotspots.”
Similarly, with “The world experiencing different spikes in COVID at a time, the ability for factories to be able to run at required levels has been a has been a challenge for us,” remarks Price.
Everybody was kind of hand to mouth for quite a while, living on inventory, either at sites or in the pipeline, which soon dried up…. It was absolutely hectic
This is a major issue when building cars, as many components transition to multiple factories for different stages and installation. When combined with tight timeframes to send supply to end assembly, there is potential for plenty of disruption in cross-border movements.
At first the “US and Europe were still running at full speed, but China's supply chain was basically stopped,” and then the situation was reversed later in the year. “Obviously, this caused a huge disruption,” explains Caputo. “Everybody was kind of hand to mouth for quite a while, living on inventory, either at sites or in the pipeline, which soon dried up…. It was absolutely hectic. We lost flexibility to react to what the customers wanted and needed.”
On top of this are big issues in freight movements, particularly for seaborne freight, which we have covered in detail here.
“Ocean and air freight is a is a significant challenge,” says Price, as “the number of the number of containers available in the world right now is low, and they're not all in the right places as they normally would be. Couple that outage with COVID at the ports, in terms of lack of dockhand workers, and it's almost a perfect storm.”
What might have taken four weeks on the water from one region to the other, it's now doubled
Caputo warns that “What might have taken four weeks on the water from one region to the other, it's now doubled, and obviously, because the demand is so high and the capacity has not ramped back up on the ocean lanes, prices are also going up.”
This is why DHL has “Put more capacity in the air,” says Goodrick. “Our global forwarding division have put a number of charter flights in place, specifically linking to China, then into central Germany and Brussels, and then charter aircraft between Germany and Brussels into London Heathrow,” which customers can take “on a plug and play basis”.
The Brexit bottlenecks
A further wrinkle within global supply chains, but particularly in Europe, is Brexit.
European automotive supply chains have been configured for free movement within the bloc for many components and manufacturing processes, so moving beyond this is an additional challenge.
So, we're seeing whilst the process is manageable, it's certainly elongating supply chains
“The whole difference between free trade agreements and frictionless trade, and getting parts from around the world through a customs process into the UK to manufacture something, whether it’s a car or a boat, or any sort of manufacture in the UK, to then get that ready to then be exported out around the world, I think that it needs an awful lot more thought and capabilities in the supply chain,” thinks Mike Bristow, Managing Director Manufacturing Logistics at DHL.
“So, we're seeing whilst the process is manageable, it's certainly elongating supply chains.”
Cash flow and consolidation
“Traditionally,” to deal with the issues currently being experienced “people would address that by adding more stock in a chain and more stock in a system,” explains Bristow.
However, cash flow is now a major issue within the industry. “We're seeing a lot more financial distress and the supply base is really starting to see that more now,” points out Caputo. “They found a way to get through last year, and even though the volumes are coming back, we're still seeing some instability there as well.”
It's important to get in front of it, because if you don't, and everybody else is maybe moving out of a particular supplier because they've been too slow, you don't want to be the last one there holding the bag as they get financially stressed
Bristow sees that many “Haven't got the opportunity to put another week's worth of raw materials on a balance sheet, whether it be the OEMs, or whether it be the vendors themselves and the suppliers and the sub-component makers.”
Therefore, “There will be consolidation,” notes Caputo. “We already see that going on. So, it's important to get in front of it, because if you don't, and everybody else is maybe moving out of a particular supplier because they've been too slow, you don't want to be the last one there holding the bag as they get financially stressed.”
Price says Dana are already “On the journey of reducing our suppliers and mitigating that risk.”
Getting to top gear
There is therefore a lot of pressure on automotive supply chains from below, but also from above now as car companies are sensing the end of a long Winter and look to ramp up across the board.
“We're very much seeing [an] ‘L-shaped’ recovery coming through with volume starting to return and that feeding through into finished vehicles, into aftermarket, and buyers,” says Goodrick.
We see demand that has come back very strong in all of those end markets
“Dana is in three markets - light vehicles, commercial vehicles and off-highway markets - and we see demand that has come back very strong in all of those end markets,” says Price. They initially saw the green shoots developing the light vehicle market in the Summer of 2020 and have been steadily increasing inventory and support since then, indicating that recovery in the industry is getting stronger as we progress through the first quarter of 2021.
Indeed, numerous car companies have raised their sales and profit forecasts, as well as actual results in the final quarter of 2020, including Honda, Nissan, Geely, and Daimler. However, the recovery when it comes down to individual markets is uneven and it appears that Asia-Pacific is leading the way, with China the stand-out market. This is likely a reflection of how economies in this region have been able to return to more normal scenarios than those in Europe, which continues to face lockdowns and has seen poorer than usual sales.
The automotive sector and its suppliers will therefore need to continue to be hyper-responsive to both market conditions and the complex supply chain planning scenarios that currently exist. Although improving economics now seem to have arrived, the demanding nature of supplying this huge industrial sector is going nowhere.
Stay tuned for part 2 next week, when we take a deep dive into what the automotive supply chain has learned in the last 12 months and how it is making steps to improve operations.
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