Crisis exposes flaws in supply chain

If auto suppliers want to see the harsh reality that will underpin some of the biggest decisions they'll face in the coming months, they need only look at dealer lots across the country.

In short, they're sparse — vehicle inventory is tight.

With consumers wary of mass transit and ride-sharing services such as Uber, auto demand has stayed surprisingly sturdy since the coronavirus hit.

Production delays and supply chain disruptions have hampered assembly and delivery of new vehicles, resulting in inventory shortages — dealers in Chicago, for example, say they lack new cars and trucks. They have a plethora of empty spaces in lots that typically are full.

As stockpiles became depleted, automakers and their global supply chains have not been able to meet the continuing demand, exposing structural flaws in an industry that won't return to normal anytime soon.

In fact, if these disruptions in the supply chain endure, they will create the need for suppliers to expand and move their production, invest in new automation technologies or potentially make the decision to sell the business and get out.

The troubles began in February, when production of components from China was disrupted by the initial surge of the coronavirus. When the virus hit the U.S., automotive manufacturing essentially was halted in mid- to late March.

Six months later, production is coming back on line, but in fits and starts. Production in the U.S. has not returned to full capacity, and the transportation lines from China have yet to fully recover from plant shutdowns and shipping shortages.

Meanwhile, the ongoing trade dispute between the U.S. and China colors everything in uncertainty.

The situation isn't improving quickly enough across North America.

In May, Mexico's auto production fell by 93 percent compared with the same month in 2019, and it is still struggling to come back. Production in Mexico, while improving, is expected to drop by one-third in 2020.

North of the border in the U.S., manufacturers are facing worker shortages, wracked by illness, worker concerns about the virus and unemployment premiums that created disincentives to return to work.

COVID-19 has shown how defenseless the global supply chain can become in the midst of catastrophe or crisis. Fixing the problems mid-pandemic is a daunting task; however, one solution may lie in returning at least some production to U.S. shores.

The supply advantages of increased U.S. production are obvious. It would tighten what's become a far-flung chain, weaning automakers off dependence on foreign suppliers and offering a leaner, faster route to reduce the cost of stockpiling inventories across the globe.

It's also beginning to make more economic sense. The global chain as a whole is only getting more expensive. Even in North America, that has become more so with the U.S. Mexico-Canada Agreement, which requires wage increases for Mexican workers and higher domestic content requirements to avoid tariffs.

Another issue is the state of U.S.-China trade relations in the age of COVID-19, making it highly doubtful that production for export to the U.S. will expand in China over the next few years.

While some suppliers are examining alternatives in other Asian locations such as Thailand and Vietnam, that carries its own risks and potential disruptions.

Still, U.S. manufacturers face obstacles of their own, including the investment in new plants, new tooling and the automation and robotics required to replace cheaper, unskilled labor elsewhere. These are no small tasks for an auto industry beset by uncertainty.

Perhaps most critical is the factory labor shortage.

Despite years of calls to rebuild U.S. manufacturing, factory work still carries a stigma — especially among young American workers — leaving the country short of skilled and unskilled employees in its plants.

Yet opportunity still knocks for smart, aggressive suppliers.

For example, automation will make for better products with less labor. And investment — be it through new plants or purchasing weaker competitors — may allow the strong to grab market share at a crucial time.

While the coronavirus may have left the industry in disarray, it's creating a prime chance to expand one's business blueprint.

In the meantime, the auto industry will remain in a state of flux.

We're already seeing how dealer vehicle shortages have elevated auto prices, killing off incentive programs that were ubiquitous just a year ago. Add in high unemployment, unsteady consumer confidence and new infection surges, and the COVID-19 "new normal" era is bound to favor companies such as Toyota, Honda and Hyundai, whose less expensive product lines will create a market advantage over the higher-priced light-truck lineups of others such as General Motors, Ford and Fiat Chrysler Automobiles.

We should also expect supplier consolidation to rise in the coming months. Traditional lean manufacturing concepts were built on product demand being "stable and smooth." Nothing about the current climate meets that criteria. Suppliers are operating at lower, uneven volumes, less productivity and higher labor costs. These costs are further burdened by the expenses of shutting down and sanitizing when new coronavirus outbreaks occur.

Many midmarket manufacturers have been temporarily propped up by government aid. But as that money dissipates and financial pressures heighten, lower valuations could provide discount shopping opportunities for strategic buyers seeking to expand their footprint. Many auto supplier leaders will need to consider the uncomfortable calculus of how the value of their businesses might degrade in a range of future possible scenarios.

No one can be certain how long all of this will last. But to only hope that the industry will return to normal anytime soon is a very naïve view.

Protracted disruptions of the pandemic in different parts of the country are real possibilities. Even if a vaccine arrives soon, there's no assurance of how effective it will be or how fast it can be rolled out to the masses.

All of this means that now is the time to start thinking about the future, to make projections to position yourself for whatever's to come. After months of outbreaks with little sign of reprieve, this will be the new normal for some time to come.