Barcelona, April 21, 2020.- The ECG is the European employer association of companies dedicated to the logistics of the finished vehicle. Their reports and analyzes are a reference and more in the current situation. He has just published his diagnosis on the measures to be taken in the coming weeks. We publish the full text in two parts.
4. Managing European supply chain risk
4.1 Starting the European engine back up: Plants set to reopen
With almost all European vehicle assembly plants shut since the third week of March, some OEMs are beginning the complex process of restarting production. We expect this output to remain slow and halting, and likely to be delayed further for a number of carmakers and markets.
European lockdowns have not necessarily mandated the closures of automotive plants. In most cases, governments have deemed manufacturing and logistics as essential sectors, although the severity of lockdowns in Italy, Spain and France effectively included non- essential manufacturing.
In most cases, even as EU borders were shut internally and externally, goods have continued to circulate, albeit with significant delays at road borders and ports. Assembly lines were shut mainly because dealership and other sales channels closed, OEMs took action to protect workers, and because of inevitable supply constraints.
Up to now, most ongoing automotive supply chain operations have been those related to the delivery and storage of products in the pipeline, whether at ports, compounds or centres processing components or vehicles to or from shuttered plants or dealerships. Parts distribution centres have also stayed open to serve the aftermarket. Some component plants and warehouses have continued to ship material overseas, for example BMW’s plant and export centre in Landshut in Bavaria, which exports material to China. Volkswagen has also kept a number of component plants operating.
OEMs have also used component and logistics facilities to help support the relief effort, including production of ventilators and procurement of masks and PPE. Some governments, such as Germany, have even worked directly with the procurement and logistics departments of OEMs, including Volkswagen, to help procure supplies and deliver equipment from overseas, especially from China.
A number of Volkswagen Group component plants were set to open on April 14th, including Audi’s powertrain plant in Györ, Hungary, as well as other Volkswagen component plants in Germany, including Braunschweig, Kassel, Salzgitter, Chemnitz and Hannover. Daimler, meanwhile, is set to restart production after Easter at its German engine and battery plants.
Some vehicle assembly plants are also starting to reopen. Kia was the first major OEM in the EU to resume production, reopening its plant in Slovakia on April 6 . Hyundai, meanwhile, restarted assembly at its plant on April 14th in the Czech Republic, which also swaps powertrain parts with Kia. Contract manufacturer Magna Steyr restarted assembly of the Mercedes-Benz G-Class at its plant in Graz, Austria on April 14 . Renault has also restarted some output at its plant in Portugal.
Other OEMs are cautiously planning to resume vehicle assembly. Daimler will start bus and heavy truck production on April 20th and plans to resume output at its major German
Jaguar Land Rover has initially said it would restart plants on April 20th, although this is potentially more optimistic for its output in Slovakia and Austria than in the UK.
Other OEMs have pushed back restart until at least early May, including BMW, Ford, PSA Group, Renault and Nissan, as well as Volkswagen’s Seat brand. FCA pushed back restarting production in Italy to May as the country extended most lockdown restrictions, while its plant in Poland was scheduled to open at the end of April.
4.2 Supply disruptions loom
While some OEMs are able to restart some operations, their stability will depend in many cases on securing the supply chain, and the extent to which demand remains shutoff. That Kia and Hyundai could resume output early in Slovakia and the Czech Republic, respectively, and Daimler in Austria, could suggest other restarts are possible in central and eastern Europe.
But so long as sales in most markets in Europe remain on pause, output is likely to remain low. In South Korea, Kia is reported to be considering prolonged shutdowns at its plants as export demand collapses in Europe and North America. That would already follow the example of most major OEMs in Japan, even before considering the possible re-emergence of the virus there.
Furthermore, any carmaker producing on its own would quickly run into supply issues if many suppliers are unable to open.
That is why sources at most OEMs express caution about the planned restart dates. Carmakers have already pushed back initial restart dates in line with the extensions of lockdowns, such as FCA in Italy. Some are likely push back those dates again.
With most major producing and sales countries in Europe likely to keep tight restrictions in place into May – if not significantly longer, in some cases – vehicle production will face a mix.The automotive industry has plenty of examples where multiple production plants were disrupted as a result of single supply chain failures. The Japanese earthquake in 2011 cut off supply from a number of key suppliers, be it of key parts, materials, paints and other technology. Shortages from chip-maker Renesas led to years of supply issues.
In 2016, a dispute with one supplier group, Prevent, led to the shutdown of six of Volkswagen Group plants. In 2018, a fire at a Meridian Magnesium plant in Michigan disrupted output at several OEMs, notably halting production at three Ford plants building the F-150 pickup truck, the best-selling vehicle in the US.
Such risks will be magnified exponentially across the supply chain in the current crisis as OEMs resume output, especially where a tier 2 or tier 3 supplier might be the single source for key components of larger modules.
Purchasing and supply chain managers acknowledge that liquidity is likely to be the major challenge among many suppliers. Even large manufacturers are severely constrained – Volkswagen is burning through €2 billion per week with plants shut – and there could be risks of insolvencies even at larger tier 1s, many of whom were already seeing pressure on profit margins before the crisis.
But many smaller suppliers are companies with 100 employees or less, including tooling and manufacturing equipment makers across the German Mittelstand, or fabric and material specialists in northern Italy. Such firms may not be able to survive more than a few weeks; they might also struggle to access credit lines and government support measures as readily as larger companies.
4.3 Mind the logistics gaps
Supplier failures are not the only risk, as OEMs will need to secure material from regions where production may remain limited and restrictions still in place, with potential freight constraints. For example, although most logistics lanes remain open, some modes are severely disrupted, such as air freight – which is often used to mitigate supplier disruptions.
Container shipping was already struggling during the earlier phase of the crisis in China, with much equipment still out of place. Shipping lines have since employed extremely slow steaming to reduce costs and avoid overcrowding at ports where consumer and industrial markets have effectively been shut.
In Europe, meanwhile, ports face space shortages as unused inventory has piled up. Border crossings remain slow with more checks carried out to prevent non-essential travel, much of of delays and disruptions in the coming months. Which would cause delays to the movement of any higher volume of automotive freight and vehicles. And at this stage, there would also rightfully be priority for medical and food supplies.
While Volkswagen Group is preparing to restart a number of component and assembly plants later in April, the company’s executives have acknowledged the risk that lockdown and travel restrictions bring to production and distribution, whether in Europe or elsewhere in the world.
Thomas Zernechel, head of Group Logistics, told the Wolfsburger Nachrichten that the company has to monitor such restrictions carefully, including the effect they might have on critical suppliers in certain regions, such as their ability to produce and ship, as well as the time it takes to cross borders, travel by ocean or move through ports. “Goods traffic must be able to flow freely,” he cautioned.
With much of Europe and the world still under some kind of lockdown, such smooth flows are far from guaranteed. Continuing problems in Italy, Spain or Belgium, for example, could shutter plants again in Germany. Already, European OEM and partner plants in Russia and Turkey – such as Ford Otosan, Oyak Renault and FCA Tofas – have had to halt production in large part because they could not receive parts from Europe.
European logistics constraints could even slow recovery in China. Sources at European premium brands in China admit that they face potential shortages of parts and vehicles from Europe in the coming weeks and months.
European OEMs could also struggle to retrieve products from other hard-hit regions as and when markets reopen, including North America, including parts or key vehicle models, such as popular SUVs. Further outbreaks in Asian countries that had initially seemed to have contained the disease, notably Japan, as well as major outbreaks in the developing world – for example in India, Africa and Latin America – also risk significant disruption.
4.4 Financial risks at logistics service providers
Along with freight and logistics constraints, another risk to European manufacturing restarts could be among logistics providers themselves, particularly should asset-owning carriers and smaller subcontractors go bankrupt. Some OEM supply chain executives feel that vehicle logistics in particular could be vulnerable to such insolvencies.
The wider logistics industry is already facing a significant crisis. The airline sector is at risk of collapse in some areas, with some passenger airlines likely to require government bailouts and assistance to survive the crisis. A number of smaller freight carriers could also face bankruptcy, although the loss of freight capacity from passenger planes has helped keep rates high for freighters. Still, the overall decline in industrial and economic volumes will hurt many.
The global container shipping industry was already struggling with declining trade volumes – driven down in part by global trade wars – overcapacity, shrinking profits and high debt levels. The industry could face the collapse of smaller carriers or further consolidation.
Third party and contract logistics providers also face huge challenges. The loss of manufacturing and distribution of key sectors will hurt many, and likely lead to price wars across many trade lanes and modes. Several major 3PLs are themselves even looking to drop contracts they no longer see as tenable – for example, ending agreements or changing rates with automotive manufacturers by declaring force majeure.
For European automotive logistics specifically, many providers will be under intense pressure. Since March, with vehicle sales at minimal levels, shipments of parts and vehicles across all modes are at historic lows.
4.5 European vehicle logistics: A weak link?
While general cargo carriers and 3PLs have at least the opportunity to pivot to other sectors – notably food, ecommerce and medical supplies – most vehicle logistics providers are less diversified across sectors.
As with smaller tier 2 and tier 3 suppliers, vehicle logistics providers are often small-to- medium-sized companies; many are likely to face liquidity challenges soon. While most are already taking measures to reduce costs including mothballing fleets, moving to short- working weeks and furloughing workers, it is unclear how many can survive shutdowns of several months.
Those carriers likely to disappear first would be smaller local trucking carriers, many of which may have 50 trucks or fewer. Following the financial crash and subsequent eurozone crisis, the vehicle logistics sector already saw many small, family-owned car carriers leave the market, notably in Italy, Spain and eastern Europe. As many of the larger European vehicle logistics providers tend to depend on these carriers for subcontracting capacity, the loss of such companies would be felt widely during even a mild recovery in volumes.
European short-sea and ro-ro shipping lines, meanwhile, are already taking measures to layup and recycle vessels, as well as to reduce sailing frequencies and to deploy ‘super slow steaming’ where possible to save costs. Some were already facing pressure on margins and finances, including investments aimed at meeting new low-sulphur fuel requirements that have come into force globally (having previously been in place in Europe in low-emission control areas in northern Europe). That has included switching to LNG vessels or installing ‘scrubbers’ to remove sulphur emissions – the economics for which have been erased, at least temporarily, by the collapse in the oil price and a much smaller difference between high- sulphur heavy fuel and low-sulphur variants. A number of smaller ferry and cruise lines in Italy have already sought government bailouts, although these are so far those more dependent on passenger traffic.
Not every company, however, is facing imminent collapse. Many rail and ro-ro lines can serve other sectors, including trailers and wagons carrying essential food and medical supplies. Ro- ro lines are also offering vessels as floating garages to store finished vehicles or excess ro-ro trailers with no current retail destination.
This extra inventory has also led to a scramble for space at ports, warehouses and vehicle processing centres. Ro-ro hubs such as Antwerp and Zeebrugge, for example, have had space issues storing finished vehicles or trailers destined for other locations in Europe, and many companies are searching for temporary storage space. Some OEMs will also be looking directly for such space, partly in consideration of when retail sales can resume.
As the last financial crisis showed, vehicle logistics providers are highly nimble. As family-run companies, most respond quickly to customer needs. Trucking assets may be put in temporary storage, but providers should be able to return them fairly quickly to service. The length of the shutdown and the recovery will put such flexibility to the test – and to a much greater extent than ever before.
5. Learning to live with the virus: Protecting workers 5.1 Health and safety requirements and constraints
As automotive production and supply chain operations resume, manufacturers and their suppliers have to adjust operations to new health and safety measures to protect workers and customers from any further spreading of the virus. This could involve processes and equipment that might lead to further constraints in vehicle output.
The measures include coordinating working shifts and patterns to allow for more social distancing, as well as redesigning shopfloor and warehouse operations to allow at least two metres distance between workers. More time overall would also be needed for cleaning and disinfection not only between shifts but also for many processes, such as material and goods receiving areas, as well as vehicle exteriors and interiors throughout assembly, testing and yard operations.
Importantly, automotive manufacturing and logistics operations would require the deployment of PPE on a potentially massive scale, including a range of masks, gloves, gowns, shields and hand sanitizers. Temperature testing and monitoring equipment could also be installed to detect workers with potential symptoms.
These changes raise a number of challenges for the return of automotive production at scale. Social distancing and disinfection measures will require more space and longer takt times, which would reduce productivity and capacity utilisation. Uncertainty over workers’ availability on given days because of possible exposure could also cause further labour constraints.
As OEMs typically require plant utilisation in excess of 80% to be profitable, such measures could upend the current economics of much automotive manufacturing and logistics.
PPE requirements could also represent a significant supply constraint. Based on estimates from the VDA, OEMs alone across Europe could require around 80m masks per month – a figure that would significantly multiply across the supply chain, including logistics centres, drivers and ports. The industry could struggle to procure such equipment in any reasonable time, especially with the pandemic ongoing and many other sectors likely to require similar PPE.
Some of these wider concerns, however, may be premature. Initial output at vehicle plants is likely to start at low levels and remain so until vehicle demand starts to recover. That gives manufacturers and logistics providers room to manoeuvre in making adjustments to operations and procuring equipment over the next few months. Hyundai and Kia plants in Europe have started operating on two shifts, for example, to allow enough room and time for protections.
The PPE required in manufacturing and logistics operations, meanwhile, is not necessarily the same standards as for healthcare workers. A number of OEMs, including Volkswagen and BMW, have been working with governments to procure equipment for frontline workers, as well as for their own staff. Tier 1 supplier Robert Bosch is also involved in producing PPE.
Those manufacturers who have restarted production, as well as used their facilities to produce ventilators and medical supplies, are already adjusting to these procedures. They are also emulating the processes put in place at factories and logistics centres in China. There will be much to learn and refine in the supply chain, but most companies are likely to adapt quickly so that they can get back up and running.
5.2 Accelerating digital tools and documentation
Digital tools are also set to play greater roles. Existing technology in plants and logistics that can reduce worker contact will see greater use, whether electronic bills of material, automated guided vehicles or remote maintenance apps and monitoring. Digital twinning and other data visualisation tools will also help to configure human, material and vehicle flows in ways that minimise contact.
In other sectors, freight carriers are turning more towards electronic bills of lading and documentation for shipping and trucking. This shift could accelerate in the automotive supply chain as it restarts, including electronic transport declarations and proof of delivery. It would be welcome, for example, if the crisis could spur wider adoption of the e-CMR, an electronic consignment note that has been available since 2011, but which a number of major European markets – including Germany and Italy – have yet to implement.
Other technology may also play key roles that could reduce the need for more severe distancing measures and PPE, including the contact tracing apps widely used in China that indicate whether someone may have been exposed to the virus. Plants could even benefit from mass testing of workers directly, as well as ‘immunity passports’, which would indicate if someone has recovered from the virus and thus has a certain period of immunity.
However, each of these solutions faces challenges, from privacy laws, untested science, or a lack of availability.
It is likely that OEMs and suppliers will have to quickly implement and change an evolving set of processes to mitigate the threat of the virus.
6. Supply chain actions for recovery
The European automotive supply chain is not about to emerge out of the coronavirus crisis altogether. Rather, it is about to enter the next phase, from a medically induced coma, to flicking open its eyes to resume some output. As production ramps up, it will require adjusting operations to help manage containment of the virus, as well as to respond to what is likely to be significant supply chain and demand volatility.
Managing these changes and uncertainty will require greater levels of collaboration and coordination than is common in the automotive sector, not only different functions at OEMs, but also with suppliers, policymakers and indeed competitors. It will also require more supply chain resilience to maintain operations and capture demand. For supply chain and logistics management, that will mean some important tactical planning adjustments – and potentially some strategic shifts over the long term. We have identified four key action areas.
6.1 Liquidity and distress support to suppliers
The scale of supplier distress during the coronavirus lockdowns and economic pause will be much higher than anything seen before. As OEMs and larger suppliers are able to extend credit lines and access government loans and stimulus, they will need to consider how they can support smaller suppliers and service providers.
In some cases, this means at least maintaining or even accelerating payment terms, especially to those most in need. It could also mean supporting these companies with their own creditors, including maintaining contracts that would allow them to secure credit.
Involving these companies where possible in other business areas – including the provision and production of medical equipment, for example – could also provide key help.
In other cases, it could mean taking more extreme action, whether in helping to fund suppliers or providers directly, acquiring them or helping to facilitate consolidation.
6.2 Focus on resilience over lean
Critical supply and product management is likely to benefit, at least in the short term, from less focus on lean inventory management. Restrictions could be lifted and reapplied in some regions, making it more important to hold enough stock to smooth supply peaks and troughs. And with longer takt times in plants because of safety precautions, just-in-time delivery and processes could make less sense for some commodities than they did before.
Similarly, OEMs will need to respond quickly to vehicle demand, which may also face periods of surge and decline as restrictions are loosened.
That is why it is even more important that OEMs work in advance with their suppliers and logistics providers to secure storage space and buffers to manage restarts – including creative options like floating warehouses on the water or tactically positioned compounds close to destination markets.
Unlike in 2008-2009, when higher inventory and over-production contributed to the sector’s financial woes, in this crisis it may help companies keep plants and dealer networks moving at key points. But the benefit is more likely to come when OEMs work hand-in-glove with suppliers and providers to ensure the right products are stored and maintained to avoid damage or mass obsolescence.
Over time, we do not expect lean processes or just-in-time operations to disappear. In fact, the need for significant cost savings is likely to bring even more pressure on efficiencies in manufacturing and logistics over the long term. However, the value of resilience looks set to be higher both during the crisis and in its aftermath.
6.3 Shore up the supply chain in Europe
After the crisis, there will be further questions over the viability of some global sourcing and international trade in the supply chain, with some supply chain experts already expecting higher levels of regional and local production.
As the development of the pandemic has already shown, localisation on its own would not have prevented many issues, not least as shutdowns spread from China to Italy to Spain and then across Europe and elsewhere. Likewise, many lower tier suppliers and components are concentrated in clusters in key regions, such as China for many electronic parts. Switching such supply cannot be done easily.
Nonetheless, most supply chain disruptions have helped OEMs and suppliers to better map their value chains, and to factor in potential risk more comprehensively, as well as other factors such as time to market. This has contributed to a wider trend towards regional supply of components and vehicles over the past decade seen in Europe, such as a higher regional production of Japanese and South Korean vehicles, just as European OEMs have expanded output in North America and China. As electrification increases, meanwhile, vehicle and battery production to serve local regions, including Europe, is set to increase.
With supplier distress and risk set to rise, regional supply chains will likely support greater resilience. Manufacturers should give more consideration to weaker links or single sources at lower tier supply levels, as well as gaps in freight and delivery services. Regional production could also buffer against additional trade and protectionist measures, which could be a further ugly consequence of the crisis.
6.4 Collaborate, communicate, coordinate
Since the coronavirus first struck in China in January, most OEMs and suppliers set up taskforces across engineering, purchasing, logistics, production and sales departments to monitor and manage critical supply situations. Such measures helped to avoid significant disruptions to European production until the crisis quickly spread. Many of those taskforces then quickly switched to monitoring supply in the other direction, such as how to get supplies and material out of Europe for China.
Now they are constantly tracking supply, demand and logistics constraints ahead of restarting plants.
Managing this wide array of supply and demand constraints will challenge OEM supply chains. The industry has little chance of avoiding disruption without some semblance of wider coordination between OEMs, suppliers, service providers and European governments.
Such an approach would allow manufacturers to phase their production and distribution activation plans, including synchronising supply chains to make sure that key suppliers are able to prioritise production and shipments. Both suppliers and logistics providers could plan where to reallocate operations, fleets and staff. Together, all stakeholders could better plan for demand as sales and retail activity resume.
Major OEMs, notably Volkswagen Group, have led the calls for such coordination. But it is not yet clear if governments or the wider industry have the capacity or the will to work together in this way. Supply chain managers and logistics providers shouldn’t wait to start planning, and all companies should ensure that they communicate and update each other as often as possible.
Each of these actions apply equally across the European outbound vehicle logistics chain as for other specialist suppliers. After all, vehicle logistics providers will be essential in safely preserving vehicle inventory and cash flow until restrictions lift, as well as in moving product as quickly as possible to customers. Any breakdown in distribution will further threaten a sustainable recovery.
That is why even as the time for wider restarts is likely to stretch further, OEMs and their partners have no time to lose in getting ready.