Editor’s note: Richard Kilgore is an associate professor of management and business administration at Maryville University in St. Louis and a leading expert in the industry disruptions reshaping the automotive industry. Kilgore discusses how the U.S.-Mexico auto manufacturing sector has been affected by the coronavirus pandemic with FreightWaves reporter Noi Mahoney.
Will supply chains immediately get back to normal? Or will it take several weeks, or months?
Months or years are likely the best units to think of in terms of ramping up to production levels to anywhere near pre-pandemic production levels. With mid-May being the start of phased reopenings, we won’t have any actionable, preliminary data until July for monthly production and sales across the industry. With most measures of sales down 40-50%, I think the first milestone would be to get back to 50% of production levels year over year.
I do believe the decision to reopen by the Big Three was primarily for the benefit of the smaller supply chain partners that are much more at risk. As an assembler with possibly 1,500 sources of components and supplies, there is equal if not more concern for the health of the supply chain.
Early pay programs and reopening support is cascading throughout the supply chain as each level sees the self-interest in aiding those at the lower levels to sustain operations if only at a minimum level.
Government stimulus programs like [the Paycheck Protection Program] require that companies use that loan for employee payroll to turn that loan into a grant, so there was regulatory pressure to reopen now rather than later in order to have access to those funds.
So the most critical period is likely not the summer, but rather next fall when we will still be in a prevaccine stage with a highly probable surge in new cases if not a full second wave.
Disruptions may be most painful then because they will be sporadic and hot spot-based and may involve government-imposed shutdowns based on health-system capacity concerns rather than economic concerns.
Firms would be wise to anticipate this and have contingency plans on any key supplier shutdown, particularly in states or countries that had high initial infection rates.
Finally, a major unknown (and less talked about) hurdle in the health of the supply chain is the issue of liability of firms to COVID-19 infection in the workplace.
A great deal of uncertainty exists as to coverage by current workman’s compensation plans and disability plans that will likely only be resolved in litigation even if new laws are passed which have not had judicial review.
Wrongful death claims could be enough to shut down many small and medium suppliers that have uncertain insurance coverage to this liability.
Mexico is still in the middle of its COVID-19 crisis. How does this affect auto manufacturers in the United States? What about Ford’s investment in Mexico?
We just saw the Big Three announce that Mexico reopenings have occurred at almost every major assembly and component plant as of May 28. As in the U.S., the actual details behind the level of reopening are either not yet available or not being released to the public, but numbers like 40% of manufacturing employees and one-shift operations are being reported.
As in the U.S., the initial focus is on working with local government health officials on the extent of employee screening, testing, protection necessary to both meet regulations and also meet employee expectations on health security.
Also as in the U.S., in Mexico there are only guidelines at the federal level with implementation authority being left to states, which means a mix of hurdles to meet to reopen and likely a series of changes to these local regulations as workplace and community infections rise and fall.
Ford has a unique interest in Mexico’s restart because of the investment in the assembly plant conversion to the all-electric Mustang Mach-E SUV in the Mexican city of Cuautitlan. There is added pressure to making sure this launch is not delayed due to production issues.
Also uncertain in Mexico’s restart will be the effect of the new United States-Mexico-Canada Agreement regarding labor laws, wages and restrictions of sourcing to North America to avoid tariffs.
It is likely there will be changes necessary to delay or modify enforcement to encourage operations to restart.
What other kinds of automotive manufacturing disruptions can we expect?
At the macro level, with long-term uncertainty on the demand side, it is likely that capacity reduction, as well as consolidation, will be part of the plan. Facilities that were operating at the margin may be closed or see shift reductions.
New programs will be put on hold and existing programs will be reviewed to reduce the number of vehicle lines — possibly on the basis of supply chain capacity rather than vehicle profit margins. The same consolidation may take place within the supply chain as weaker members are forced to close or merge with rivals to create a sustainable production quantity.
In an industry that was already seeing sales and production declines in 2019, some may see this as the appropriate time to negotiate closures with union, government and other stakeholders, whereas in normal times those might have been more of an obstacle.
On the micro level, there will be widespread issues with productivity and quality as processes are reengineered and workers restricted by PPE and other protective shielding at the work site.
Particularly in the auto industry, lean initiatives that depended upon a certain level of production and supply chain certainty will no longer be sustainable. Prior heavy investments in automation will no longer see the early payback due to volume declines, which will likely curtail future productivity improvement initiatives.
Limited capital expenditure spending may be dedicated to layouts to reduce virus transmission rather than layouts to increase quality or productivity.
At both levels, there will be an initial “honeymoon” period where everyone is optimistic and working together to keep their employer and industry healthy. Inevitably, complacency will set in and staff reductions and facility closures will lead to a more difficult transition to the new normal.
Even worse is the likelihood that complacency will occur in adherence to protective measures — leading to a resurgence, which makes subsequent “reopenings” the more difficult challenge.
Before COVID-19 started, Ford was planning to build all of its electric vehicles in Mexico. Do you think those plans will change?
No, I have no figures to support my opinion for those programs, but typically this close to a 2020 launch, I would expect the capital expenditure investments are too substantial and too unique to electric vehicles to consider moving or restarting in a different location.
Uncertainly works against such moves because the worst case is that you do make the move only to have a vaccine or treatment beat schedule expectations and make that decision the wrong one in retrospect.
Electric vehicles are the future of the industry; they will need the Mexican capacity eventually so it is unlikely to be a good financial decision long term to change those plans.
What may change is the supply chain vendors that support Ford’s Mexico facility as many of the uncertainties discussed above become reality.
And as we saw with Tesla, there may be a number of technical issues with the new electric vehicle and the new processes that may actually be easier to find and solve at a longer period at a low production rate.
It may actually be a positive for the launch that the initial volumes are lower due to both restart restrictions and demand restrictions. The inevitable recall issues of the first version of the all-electric Mustang Mach-E SUV will be at a much lower volume.
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