- As automakers have begun resuming production, suppliers are facing challenges of their own, in some cases causing production to stop at the assembly plants.
- Toyota, VW, and Mercedes-Benz have all restarted production and stopped again in recent days, all citing supplier issues.
- The risk of default to automotive suppliers’ businesses has risen considerably since the beginning of the year.
Shortly after Daimler restarted production at its Mercedes-Benz plant in Tuscaloosa, Alabama, in mid-May, it stopped again last week. The facility, which builds GLE, GLS, and C-class vehicles, was short of necessary parts coming from suppliers in Mexico, which has not yet restarted production, Mercedes told Reuters. The same scenario has played out this month at U.S. Toyota and Volkswagen plants. The reason? Issues with suppliers.
Consider the Ford F-150 as an example. The automaker requires more than 2000 parts for its F-series pickups, so one kink in the supplier network can be very detrimental to operations.
After anywhere from four to seven weeks of production being put on pause by the COVID-19 pandemic, automakers have been eager to restart their plants and restock dealer lots across the country. With stay-at-home orders ending or loosened in recent weeks, automakers have been able to resume production—but it hasn’t been without any issue arising.
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First, the carmakers had to test and implement plans that would keep their factory-based employees safe from the spread of coronavirus. For Ford, GM, and Fiat Chrysler Automobiles (FCA), returning to work meant satisfying the expectations of the United Auto Workers union—and for every automaker, avoiding any widespread infection among factory workers, which could be disastrous for production in addition to the harm to workers themselves.
But as production has resumed at the assembly plants, suppliers are facing their own difficulties, including cash shortages and the challenge of keeping workers safe. While the car companies have plenty of cash on hand from various sources including bond offerings, suppliers don’t have the revenues and other avenues to be financially stable while production is paused.
Mercedes-Benz was one of the earliest to restart production, in late April at its Alabama SUV plant. Nonetheless, a parts shortage pushed the company to again pause production during the week of May 18. Both Volkswagen and Toyota took similar measures because of issues with their supplier network.
Volkswagen has now restarted its Chattanooga, Tennessee, plant, but said in a release back in April following the additional delay, “Before setting a new start date, Volkswagen will weigh the readiness of the supplier base, as well as market demand and the status of the COVID-19 outbreak.”
Late last month Standard & Poor, a ratings agency, said that the likelihood of default among automotive suppliers had jumped in April, rising to 20 percent, up from 5 percent at the beginning of the year. The agency added that risk was elevated for smaller suppliers, known as Tier 2 or Tier 3 suppliers, which provide parts directly to the largest, Tier 1, suppliers.
In order to combat a wave of bankruptcies and other issues, Julie Fream, CEO and president of the Original Equipment Supplier Association, a group representing automotive suppliers, told CNBC that suppliers needed $20 to $25 billion of cash. Lobbying efforts for that money are ongoing. Last week, Ford decided to pay the bills owed to suppliers early in order to ensure that parts keep moving through the supply chain.
“The ecosystem for getting plants back up to full production is complicated,” Ford chief operating officer Jim Farley said in a shareholder meeting on May 14. “All of our production and manufacturing operations rely on healthy suppliers, and their ability to start up is really critical.”
Just as the automakers have faced challenges in keeping their employees safe, so have the suppliers. Several automakers released the playbooks they are using to prevent the spread of COVID-19 in their plants, and Lear, a Tier 1 automotive supplier, did the same so that smaller suppliers who lack the resources to create their own plans can use the playbooks as a reference in creating their own protocols.
Ray Scott, president and CEO of Lear, said in a statement last month that although the company’s Safe Work Playbook “is not a one-size-fits-all approach, we are sharing these potentially helpful recommendations with other companies as they develop their own plans for resuming operations.”
Overall, what these challenges amount to are another layer of complexity for the automakers to navigate in getting new vehicles to dealer lots amid what has been an unprecedented pandemic. The return to production isn’t the end of the story; capacity has been reduced, and suppliers have to overcome a number of hurdles before a return to some sort of normalcy in the industry.
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Source: Motor - aranddriver.com
