Auto Industry Swings from Trade-Deal Optimism to Pandemic Pessimism

pendulum with happy faces and one sad face

Just when you think it’s safe to go back in the water, another shark rears its head. That pretty much sums up the automotive industry’s reactions to global events over the past six months. According to the Q1 2020 Automotive Supplier Barometer from the Original Equipment Suppliers Association (OESA), which takes the pulse of the industry every quarter, supplier sentiment was much improved from Q4 2019 thanks to passage of the USMCA and steps taken toward a trade deal with China.

However, the picture isn’t all that bright. The Q1 2020 index marked the seventh straight quarter of net pessimism. Even though supplier sentiment was 12 points higher than a year ago, larger, more globally exposed firms continued to show strong levels of pessimism, said the OESA’s summary of the latest survey. Firms with revenue below $151 million “shifted” into optimistic territory. “Regardless of revenue size,” said the OESA, “results improved from the prior quarter.”

“Automotive suppliers have been navigating acute trade policy uncertainty for the past two years,” said Mike Jackson, Executive Director, Strategy and Research, OESA. “Passage of the USMCA and a first-phase trade deal with China has fueled a sharp jump in supplier optimism. This illustrates just how foundational these policies are in providing certainty and clarity across sophisticated and highly integrated regional and global supply chains.”

With the threat of trade and tariffs largely resolved, poor sales became the top concern of automotive suppliers. Production break-even levels rose to 15 million units. The median all-in capacity utilization rate remained unchanged from the same period a year ago at 80%. Suppliers running over 90% utilization are investing in new capital equipment, outsourcing, and flexible manufacturing schedules/overtime.

A caveat is warranted at this point: “Sampling for the survey was conducted from the end of January until mid-February, when the impact of the coronavirus was still unknown.” Despite the substantial boost to supplier sentiment, the barometer reading remains marginally negative as uncertainty persists, said the OESA.

Molders and mold makers have to be worried about their supply base

As shutdowns swept through the automotive supply chain and plants were idled and workers laid off, some OEMs were “delaying payments to vendors and asking lenders to adjust terms,” said an article in the April 2, 2020, edition of the Wall Street Journal (“Auto-Parts Suppliers Teeter as Car Production Halts”). Work stoppages at OEMs send a chain reaction through the supplier base, and once it has hit full stop it’s not easy to get started again. It’s especially difficult in small, privately held companies. That puts these companies at risk of going under — never to reopen again, said the WSJ article, especially if “car-plant work stoppages drag on into the early summer.”

Advanced Purchasing Dynamics (APD), a Plymouth, MI–based consultancy specializing in purchasing strategies for OEMs and suppliers, recently assembled a crisis management team to study issues impacting the industry. It developed a “restart and run playbook” to help purchasing departments manage through this crisis while achieving important purchasing strategies and company objectives.

Mike Wynn, Vice President and practice leader at APD, works with suppliers, including plastics processors and mold makers. “From our perspective, everyone is part of the tiered supply chain,” said Wynn. “Molders and mold makers have to be worried about their supply base as well as the OEMs. Currently, most are trying to get an understanding of what an opening might look like. OEMs are making requests as to the readiness of suppliers, but suppliers are questioning the projected start dates and volumes. Despite OEM hopes for a quick return to full volumes, suppliers feel they need to proceed with caution.”

The Wall Street Journal reported in the April 28 edition that U.S. vehicle makers are “targeting May 18 to resume some production at their U.S. factories” that were closed in March because of the coronavirus, but that looks a bit dubious. The companies are working with the UAW to draw up “safety protocols for reducing exposure risks for workers.” A Ford spokesman told the WSJ that the company “hasn’t decided when it will restart North American factories,” adding that it is “continuing to assess public health conditions, government guidelines, and supplier readiness” to determine the right time for opening.

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