COVID-19: Challenges in the Automotive Industry Amid Factory Restarts in Europe

COVID-19: Challenges in the Automotive Industry Amid Factory Restarts in Europe

Executive Summary

  • Over the past few weeks, auto makers across Europe have begun reopening factories, albeit at a fraction of pre-crisis production levels, as part of a broader industry effort to get back to work amid the coronavirus pandemic.
  • While many automotive plants reopened – mostly at partial capacity – through the month of May, a Everstream Analytics analysis of original data on the duration of production stoppages at 244 European car plants shows that the impact on auto makers has varied greatly depending on the country.
  • A very high number of COVID-19 related deaths has, in most cases, correlated with a particular long average downtime at Original Equipment Manufacturer (OEM) plants due to more severe government-mandated lockdowns. The two countries with the highest number of deaths in Europe linked to COVID-19 – the UK and Italy – have had the longest average production shutdowns, 67.3 days and 58.8 days respectively.
  • Besides new internal health & safety protocols for thousands of workers at car factories, auto makers will likely face additional external risks to cope with such as regulatory uncertainty, supplier unavailability, and logistical bottlenecks. 
  • The adherence to new health guidelines is likely to remain under particular scrutiny by local and regional authorities that could be tempted to set examples for other industries. In France, one car maker was forced to suspend production for an additional two weeks at one of its plants due to the lack of health and safety measures.
  • Persistent capacity shortages in the air freight market continue to threaten the safe supply of component parts, in particular out of Asia, causing record-high prices per kilogram on outbound trade lanes that peaked in the week of May 18.
  • Risk managers will also face the prospect of key suppliers potentially having run out of cash and forced to file for insolvency or bankruptcy proceedings in their home countries. In total, there have been more than 350 recorded automotive-related company insolvencies this year, with the daily average of supplier bankruptcies increasing significantly in the second quarter of 2020.
  • Given the fluidity and uncertainty posed by COVID-19, supply chain professionals will need to continue to be prepared for further disruptions in the coming weeks and months as start-stop production could become part of the new normal for manufacturing companies. This report outlines several recommendations on how to cope with this new normal. 

Background

Over the past few weeks, auto makers across Europe have begun reopening factories, albeit at a fraction of pre-crisis production levels, as part of a broader industry effort to get back to work amid the coronavirus pandemic which has significantly reduced demand and increased inventory levels. 

At the beginning of April, more than 1 million of Europe’s 2.6 million auto workers had been furloughed at large car makers and suppliers, according to data released by the European Automobile Manufacturers’ Association (ACEA). The industry accounts for more than 11 percent of all manufacturing jobs in the European Union, highlighting the economic importance of the sector for the entire continent. 

Source: Everstream Analytics

The restart of European factories after weeks, and sometimes months, of standstill is therefore a significant signal. New processes and guidelines used in the plants could offer a pandemic-era blueprint for other global manufacturers that will alter workers’ daily lives and at least, temporarily de-prioritize productivity. 

Based on experiences made in China, car makers have overhauled production methods to reassure workers about the safety of returning to the production line, with some even producing masks for their own employees. In addition, Volkswagen, for instance, has detailed a list of 100 workplace changes in a manual designed to minimize the risk of infections that include taking temperatures at home each morning, disinfecting tools before breaks or after shifts, and buffer periods between changing shifts. While some auto makers have resumed production as early as April 2020, others have yet to set specific dates for reopening their plants, in particular in countries still struggling with increases in the number of daily COVID-19 infections, such as the United Kingdom. 

To address the restart challenges in the automotive industry amid the COVID-19 crisis, this report analyzes 244 European assembly and component plants of major car makers to understand how the severity of the COVID-19 outbreak in countries with a strong automotive industry has impacted the sector and led to production downtimes since March 2020. This analysis serves as a guideline for other manufacturing industries when assessing COVID-19-driven disruptions in their own supply chains, including at manufacturing facilities of their sub-tier suppliers for which information is often scarce. The report also allows organizations to better understand the correlation between government-mandated restrictions and impacts on production downtimes per country in view of a potential second wave of infections. In addition, the report examines the main factors that could lead to further disruption during the gradual restart phase of factories such as logistical challenges, regulatory uncertainty, and supplier unavailability. 

Italian production normalizes while some UK factories remain halted

While many automotive plants reopened – mostly at partial capacity – through the month of May, a Everstream Analytics analysis of original data on the duration of production stoppages at 244 European car plants shows that the impact on auto makers has varied greatly depending on the country. 

A very high number of COVID-19 related deaths (10,000 or higher) has, in most cases, correlated with a particular long average downtime at Original Equipment Manufacturer (OEM) plants, mostly because governments adopted a particularly severe approach towards the domestic movement of people and non-essential business operations, which sometimes included automotive production. In fact, the two countries with the highest number of deaths in Europe linked to COVID-19 – the UK and Italy – have had the longest average production shutdowns, 67.3 days and 58.8 days respectively. More generally, the four European countries worst hit by COVID-19 fatalities, including the UK, Italy, Spain and France, are among the top 6 countries in which car plants were shut down the longest. However, in cases where there were lower than 10,000 fatalities linked to COVID-19, the correlation with the impact on the duration of plant closures becomes weaker. 

In the UK, which started to ease lockdown measures in early June, stark increases in daily infection numbers in April and May forced the government to extend lockdown measures multiple times, causing production challenges for the automotive industry there. BMW’s Rolls-Royce plant in Goodwood was the first car factory to reopen production lines in early May. However, many car plants only reopened throughout the month of June, including factories belonging to Honda, Nissan, and Jaguar Land Rover. Underlining the severity of the impact on the UK car industry, about 14 percent of car plants in the UK remained halted as of June 18, more than in any other European country. Two of them – PSA Group’s Ellesmere Port plant and Jaguar Land Rover’s Castle Bromwich factory – are scheduled to only reopen by August and September respectively due to internal restructuring programs. In total, both plants will have been closed for more than 100 days, likely impacting the financial situation of many nearby suppliers relying on the OEM’s production schedules.  

On the European mainland in Italy, which has experienced one of the longest lockdowns related to COVID-19 worldwide, car plants have been halted for the larger part of the months of March and April. Since the government lifted some restrictions on travel and non-essential business operations in early May, the large majority of plants belonging to car makers including Fiat Chrysler, Ferrari, and Lamborghini have resumed some production activity at assembly and component plants. Fiat Chrysler’s factory in Pomigliano near Naples in southern Italy was one of the last to reopen production lines on June 16 after having been shut for 97 days.

Figure 01: Average production downtime at automotive plants in Europe (in days)*. Source: Everstream Analytics

Following the UK and Italy, the countries with the longest average production shutdowns of their car plants include Portugal (49.4 days), Poland (48.3 days), and France (48.2 days). As Portugal has recorded a very low number of COVID-19 related deaths, the majority of car plants reopened within 50 days of the initial closure, including factories belonging to PSA Group, Daimler, Volkswagen, and Renault. However, the average production downtime has been largely impacted by Toyota’s factory in Ovar which remained shut as of June 18, with no official reopening date set. This is likely due to a particular severe outbreak and subsequent lockdown measures in the city of Ovar where the plant is located. 

Similarly, Poland was the first country in Europe to ease its lockdown in mid-April, prompting many car makers to partially resume production through the month of April. However, supply challenges remained for a number of car plants belonging to PSA Group and Fiat Chrysler, which only resumed between mid-May and the beginning of June. Completing the top five countries in Europe with the longest production shutdowns in the automotive industry, France has been among the worst affected countries in terms of COVID-19 deaths worldwide. Its government-mandated lockdown officially eased on May 11, which allowed many car factories to resume operations a few days later. By May 18, almost all of the large plants in the country had resumed at least partial production, when PSA Group’s plant in Rennes came back online after a 63-day closure. 

Figure 02: Share of European car plants that remain closed as of June 18 by country. Source: Everstream Analytics

Among the countries which experienced the shortest factory downtimes are Turkey (30.1 days), Russia (28.3 days), and Sweden (23.3 days), all of which have had a relatively low number of deaths linked to COVID-19. In the cases of Turkey and Sweden, both governments have taken a less severe approach to restricting the movement of people and halting non-essential business operations. In Sweden, no lockdown has been imposed at all and most OEM plants had already resumed operations between April 20 and April 30. Factories of National Electric Vehicle Sweden (NEVS), which acquired the assets of former Swedish car maker Saab Automobile in 2012, were among the few car plants not to have closed at all. In Turkey, the government had imposed short periods of curfews in light of a high number of COVID-19 infections until June 1, but encouraged important economic sectors such as the car industry to quickly resume operations. By mid-May 2020, all major car plants in Turkey had resumed at least partial production.

Source: Everstream Analytics

In Russia, most domestic and foreign car makers stopped production at the end of March when the Russian government imposed paid holidays for workers across the country to curb the virus outbreak. Despite Russia now having the third highest number of COVID-19 infections in the world, many domestic car plants, including those producing vehicles for PSA Group, BMW, Kia, Audi, and Daimler resumed production by April 20. By contrast, some wholly-owned foreign car plants such those belonging to Renault and PSA Group have so far not set resumption dates as daily infections are still higher than 5,000 cases. 

Figure 03: European car plants with the longest production stoppage as of June 18. Source: Everstream Analytics

As this report outlines, a very high number of COVID-19 related deaths (10,000 or higher) has, in most cases, correlated with a particular long average downtime at Original Equipment Manufacturer (OEM) plants. This is significant, as organizations can look to this notable factor when planning forward-looking contingency measures for a potential second wave of infections. In particular in the just-in-time supply chains of the automotive industry, procurement and logistics managers can consider adjusting inventory levels according to the risk of a renewed regional or national lockdown that might disrupt inbound supply availability for a certain period of time. While holding larger levels of stock may not always be financially viable, planning with varying levels of stock in countries with major production footholds to increase supply chain resilience and agility may, however, be worth considering. 

Unavailable suppliers and logistical bottlenecks may disrupt gradual restarts

Adopting new internal health & safety protocols for thousands of workers at car factories is in itself a significant challenge that may impact productivity levels for months to come. In addition to that, large car makers in Europe are facing three external risks that have the potential to further delay factory restarts or even cause another period of production downtime. The cases of Renault and Kia have highlighted in recent weeks that intermittent production halts may become the new normal in the automotive industry. 

First, as automotive plants, which often employ thousands of workers, restart production, their adherence to new health guidelines are likely to remain under particular scrutiny by local authorities that could be tempted to set examples for other industries. To prevent any violation of local health guidelines, Volkswagen has detailed a list of 100 workplace changes to minimize the risk of infections that include buffer periods between changing shifts and social distancing at all times. Highlighting the persistent risk to production lines that OEM plants will face going forward, Renault’s Sandouville plant was ordered to again stop production between May 7 and May 22 – following its initial restart in late April – after workers filed legal action with a local court over the lack of health & safety measures for employees at the factory. In total, the site has been shut for 58 days. 

Second, persistent capacity shortages in the air freight market continue to threaten the safe supply of component parts, in particular out of Asia, to manufacturing facilities. The collapse of passenger travel has led to a dramatic reduction in belly capacity, with freighters and charters only making up a small portion of the lost capacity. Coupled with strong demand for personal protective equipment (PPE) out of Asia, this has caused record-high prices per kilogram on outbound trade lanes until its peak in the week of May 18 that have strained logistics budgets, congested air cargo terminals, and further caused financial pressure on suppliers or OEMs, depending on who is paying for the extra costs. While rates have come down in recent weeks as demand for PPE equipment eased, they still remain at a very high level and are unlikely to decrease significantly until sufficient belly capacity becomes available on the market.

In March 2020, an unnamed Jiangsu-based Chinese supplier shifted production to a plant in Guanajuato, Mexico due to a lack of parts in China, and airlifted the products back to its customer’s assembly line in Japan. The move cost Mazda, the customer, more than USD 5 million (EUR 4.44 million) in extra shifts and air freight charges. In other cases, some air cargo shipments – despite high prices – have not been uplifted on scheduled flights, causing several days of delays in an industry that relies on just-in-time delivery. 

Last but not least, as more OEMs have continued to ramp up production in past weeks and months, supply chain risk managers will face the prospect of several of their key suppliers potentially having run out of cash and forced to file for insolvency or bankruptcy proceedings in their home countries. The liquidity shortages are mainly driven by suppliers often having to pay for labor, raw materials, and logistics services upfront. 

Figure 04: Weekly percentage increase of air cargo rates out of Shanghai. Source: TAC Index

An analysis of Everstream Anaylitcs supplier insolvency data shows that the number of recorded global insolvency incidents in the automotive industry, which includes all tier levels from system-relevant Tier 1 suppliers down to Tier 3 suppliers of plastics or metal parts, has steadily risen since February 2020 when China and other Asian countries first imposed lockdowns. In total, there have been more than 350 recorded automotive-related company insolvencies in 2020.

While the monthly average of insolvency filings in the automotive industry has been stable in the first three months of 2020, with around 3 filings per day, there has been a notable uptick in the second quarter of the year. Through the month of April and May, there have been about 3.6 insolvency filings per day, a 20 percent increase compared to the month of March 2020. In addition, 48 insolvency filings have already been recorded for the month of June 2020, with the average number of daily filings increasing to 4.36, which represents another 21.1 percent jump. The increases have come despite temporary changes to bankruptcy law in many countries, including in Germany, the United Kingdom, France, and India, that relieve companies from filing for such measures until the third quarter of 2020.

Most experts in the automotive industry have expected a sharp increase in supplier insolvencies from June 2020 when many companies will have been informed whether they are eligible for government-funded financial support. A negative decision could force some of them to apply for bankruptcy protection. 

Among companies that have filed for bankruptcy proceedings in the past weeks are also a few notable Tier-1 automotive suppliers, which supply to major OEMs directly through their numerous local plants. While experts expect lower-tier suppliers to bear the brunt of the crisis, this underscores the possibility that even larger automotive suppliers are unlikely to be spared and the difficulties the entire industry is facing.

Figure 05: Supplier insolvency incidents in the automotive industry YTD 2020. Source: Everstream Analytics
Figure 06: Notable automotive suppliers that have filed for insolvency or bankruptcy proceedings in recent months. Source: Everstream Analytics

Recommendations 

Given the fluidity and uncertainty posed by COVID-19, supply chain professionals will need to continue to be prepared for further disruptions in the coming weeks and months as start-stop production could become part of the new normal for manufacturing companies. Everstream Analytics outlines several recommendations below on how to cope with regulatory uncertainty, supplier unavailability, and logistical bottlenecks. 

  1. Monitor COVID-19 fatality numbers in key locations: As high fatality numbers linked to COVID-19 increase the likelihood of severe government-mandated lockdown measures that may also impact production activity, organizations should continue to monitor these figures in key geographical locations. In case a second wave of infections starts to spread, this factor can help the decision-making process when having to prioritize where to increase costly inventory levels to mitigate the risk of supply shortages. 
  • Identify production resumption schedules: Customers should continue to keep abreast of regulatory changes that allow businesses to reopen and prepare to bring manufacturing operations back online. Taking into consideration that governments across Europe are mostly easing restrictions to allow industries to restart operations, organizations should monitor developments closely to assess whether restrictions on their respective sectors could be lifted.
  • Adhere to new regulatory health & safety protocols: To ensure workers’ safety and to reduce the risk of regulatory action by local authorities, organizations should adhere to the greatest extent possible to regional or national COVID-19 guidelines for manufacturing business operations. Car maker Volkswagen and Tier-1 supplier Lear Corp have published comprehensive social distancing guidelines for automotive workplaces that can serve as references for other industries as well. 
  • Explore alternative routes or modes of transportation: To ease the logistical bottleneck in China, organizations could explore re-routing options depending on the time-criticality of the shipment. Hong Kong could serve as an alternative to the, at times, congested Shanghai Pudong air cargo gateway, whereas less time-sensitive shipments could be converted from air to rail and sent along the Europe-China rail corridor. Transit times from Xi’an in central China to the Neuss rail terminal near Duesseldorf and Cologne in Germany have recently been shortened from three weeks to only 10-12 days. Air-to-ocean freight conversion have also increased in recent weeks for some destinations in Europe, including Germany.
  • Monitor financial distress on supplier level: To prepare for potential supplier bankruptcies, customers should closely watch the financial situation of their sub-tier suppliers, in particular privately held firms which are not required to disclose financial information, and understand which suppliers are most critical. The focus should be put on those suppliers with the greatest impact on revenue and those that are the most difficult to replace. In case no alternative sourcing options are available, financial support could be offered to a struggling supplier by increasing volumes or adjusting payment terms to ease the liquidity shortage. In South Korea, Hyundai pledged to support struggling local suppliers with EUR 350 million in advance payments or credit loans back in February 2020. 

As the situation remains fluid and new lockdowns continue to be a persistent threat – as shown in Beijing, China and Chennai, India last week – organizations should remain vigilant about renewed outbreaks and refine contingency plans for a second wave of disruption as they shift their focus on restarting production. 

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