‘The whole world did not even notice’, when, 17 years back, the SARS outbreak gulped the sixth-largest economy then, China, slowing its growth by one percentage point. Today, an even lethal coronavirus has choked the world’s second-largest economy, China, which accounts for nearly 39% of global economic expansion, calling for more than just a ‘notice’. One of the largest growth drivers for China has been its automotive industry (six times the size it was during the SARS outbreak). Reeling under the shivers of slowdown, it showcases one of the mammoth “corporate casualties” of Coronavirus, even beyond China. In this article, we attempt to uncover the roots of coronavirus hit automotive supply chain disruption, assess its impacts, gauge global exposures and foresee the way forward.
Uncovering the roots
The world’s most productive car factory run by Hyundai in South Korea fell quiet last week post the suspension of complete operations. A few hours later and a few kilometers away, Tesla announced a delay in deliveries of its Model 3 sedans. Hankook Tires, the world’s 7th largest tire company, announced a reduction of its production volumes. Coming home, Mahindra & Mahindra highlighted chances of failure to meet the deadline for the completion of sales of BS-IV vehicles. The last few days have witnessed unforeseen disruptions in the automotive sector across the globe. But, were these instances interlinked? Let’s dig deeper.
The Hyundai factory shut down in South Korea was, apparently, due to the inability of the company to procure wiring harnesses, without which its automobiles cannot be ready. Hyundai procures these harnesses from South Korean firms having plants in China. Tesla’s delay in delivery is reasoned to be due to a delay in production ramp-up in its new Shanghai (China) plant. Mahindra & Mahindra is unable to obtain just one part needed to complete production, which is supposed to come from China! Of late, China seems to be the epicenter for all the mishappenings in this industry. More importantly, China also happens to be the epicenter for Coronavirus!
Let’s unravel more. China with its pro-automobile and ancillary parts policies, over the years, had attracted multiple automobile companies to set up plants there, accounting for about one-fifth of global manufacturing output. All major players have some hooks of their supply chain tied to the Chinese map. Now, the Chinese government, to control the Coronavirus epidemic, has ordered shut down of 11 provinces, most affected with the virus. These provinces contribute two-thirds of the country’s automobile and ancillary parts production and are the hubs for the motor industry, thereby creating a global vacuum in the auto ancillary parts supply building a bottleneck for global auto sector players. Probably, the reason why Hankook tires, the 7th largest tire company, decided to curtail production as automobile companies are not able to manufacture and thereby reducing the demand for tires.
Assessing the Impacts
To assess this vacuum, it is necessary to be aware that carmakers have long supply chains to source parts; they are also big consumers of raw materials and chemicals, textiles and electronics; and their fortunes affect millions of service sector jobs in sales, repairs, and maintenance. In short, one hit and the entire value chain feels the heat!
As per company estimations, if the Hyundai plant remains shut for 5 days, it would suffer a production loss of 30,000 vehicles draining over ~600 million dollars. This is a direct impact on Hyundai.
A study of the behavior of suppliers of the Hyundai plant, reveals a clear tinge of pain. Hyundai Mobis, a parts affiliate of Hyundai Motor Group, has begun to reduce production of modules as its captive buyers, Hyundai Motor and Kia Motors, plan to stop production. The smaller parts affiliates feel cash strapped and are on the verge of shut down. Employees, the unfortunate ones, without any fault have been asked to go for forced leaves and face pay cuts. It’s a chain reaction – typically, depicting the ‘contagious’ nature of coronavirus!
Gauging the exposures
Lessons learnt from the 2011 Fukushima earthquake, wherein shut down of a single microcontroller company devastated the global automobile landscape, pushed companies to diversify their supply chains. However, corporates, falling prey to attractive policies, took supply chain risks while relying a bit too much on China. Hyundai too diversified its sourcing of wiring harness, the shortage of which led to the shutdown, but the diversification was across 3 companies, all based in China!
The worst exposure is for South Korea, which imports 30% of its auto parts from China. All major players in South Korea have suspended at least one of its assembly lines. Proximity to China, lured South Korea to depend heavily on it for ease of transport and low costs, thereby shortening their in-stock period.
Japanese companies have safer impacts because they have diversified parts acquisition across a global network that includes Southeast Asia, Europe, and the US.
The car industry in Europe or America is much less exposed to a Chinese risk than Asian countries like Korea, owing to the distance from China. Their last orders are still on the way from China, as it takes time to cover the Pacific, increasing the in-stock period, giving them an extra cushion to plan for the Chinese shutdown.
Speaking of India, majority of players have Tier 2 suppliers based in China. Accordingly, MG Motors and Hyundai India group, suggest they can afford a few more weeks of shut down. However, for Mahindra and Mahindra, one of its core components is sourced from China!
Conclusion: Way Forward
The need of the hour is to fill up the vacuum. Ministries have begun to step up. To tackle supply shortages, the South Korean automobile ministry is attempting to simplify the import processing for auto parts from Vietnam, Cambodia and the Philippines and provide financial subsidies to local auto part makers. SIAM in India is continuously having meetings with industry players to provide solidarity. Localization plans, though expensive, have come up in the talks. But, these would only treat the epidemic, not erase it.
Coronavirus has questioned many basics in this industry. It has brought to light an often forgotten concept of ‘Supply Chain Risk Management’ calling for a fresher look at long term supply chain strategies. Times to come may see purging of ‘the China dependent supply chain’ menace and evolution of the automotive supply chains.
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About the author: The post is written by our EZPP partner Aayush Jhawar with relevant edits and changes by our editorial team. Aayush has graduated from SPJIMR and currently works with the Boston Consulting Group.
Disclaimer: All views expressed in the post are personal, and not related to any organization to which the writer belongs.