The global manufacturing industry is in the midst of an evolution. New consumer needs, advancing technology – AI and automation – and an uncertain trade environment are just a few of the factor’s companies have been grappling with over the past few years. In 2020, the situation for manufacturers has become even more challenging with the COVID-19 outbreak, which is affecting supply chains and disrupting manufacturing operations around the world.
The most vulnerable companies are those that rely heavily or solely on factories in China for parts and materials. Many of these companies have been forced to source production in this region due to increased pressure to reduce supply chain costs through offshoring and outsourcing. With these cost-cutting measures, a disruption in the supply chain results in a quick stop to manufacturing due to a lack of parts.
For example, the global automotive industry, which imports more than $34 billion in motor parts from China annually will be significantly impacted. In fact, companies throughout the supply chain are already being forced to make tough decisions – slowing or halting production, resourcing products and reevaluating revenue.
Some vehicle manufacturers, with the list growing each day, have already had to throttle back production in their plants outside of China. For example, Fiat Chrysler Automobiles NV announced on February 14 that “it is temporarily halting production at a car factory in Serbia because it can’t get parts from China.” Nearly every other automaker has announced it is closely monitoring the situation and will make decisions based on available products. With the timing of the epidemic and its relation to the Chinese New Year, it is expected that companies relying on a 30-day supply likely ran out at the end of February.
Additionally, within automotive and other industries, this issue and its impact starts at the very bottom of the supply chain. The tool and die industry, who is frequently instructed to source tool builds from low-cost countries such as China, is already experiencing 30- to 60-day production delays and may grow depending on the duration of the outbreak. As these delays make their way up the supply chain, it will impact the automakers ability to launch new vehicles based on their current schedules.
Furthermore, China represents one of the largest markets for automotive sales, and in February car sales dropped 80%, which significantly impacts the industry’s ability to meet forecast revenues for the year – from suppliers through automakers. And, China’s PMI, a metric that measures the health of the manufacturing industry, dropped 15 points.
The bottom line is we should brace for a major effect on manufacturing worldwide. Companies have already put plans in action, but the worst is yet to come. We will not know the true effect of the pandemic until sometime in the future as the impact ripples down the supply chain.
