Weakest link in supply chain threatens car industry revival

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When Germany’s top car executives dialled in to a crisis call with Chancellor Angela Merkel earlier this month, they were not just concerned with their rapidly evaporating revenues.

The heads of Volkswagen, BMW and Daimler discussed the dire effects of the coronavirus pandemic on their thousands of smaller suppliers, whose survival is key to restarting production once the outbreak that shut their plants across Europe and the Americas finally eases.

Although some of the biggest carmakers — including Toyota, Renault, Hyundai, Volkswagen and Volvo — are preparing to reopen some plants in Europe, car sales have shuddered to a near-halt and the more immediate problem is that parts of the vulnerable and long supply chain that underpins the industry are going bankrupt.

“We are very worried about [suppliers’ liquidity],” Frank Witter, VW’s chief financial officer, told the Financial Times.

With VW contractors in northern Italy, Spain and around the globe going out of business, the world’s largest carmaker was working on “individual solutions where we can help”, he said.

The pace of the disintegration of auto supply chains has surprised even those who reinforced their procurement plans after the previous financial crash and the Fukushima nuclear disaster by identifying back-up contractors for every crucial component.

Continental, one of the world’s largest car parts maker and which makes everything from brakes to radios to augmented reality windscreens, said dozens of its 2,300 automotive suppliers were on the brink of collapse.

Within days of widespread shutdowns being enforced across Europe and the Americas, the effect on the labour market also became apparent, as car suppliers, which employ more than a million people in the US, Germany and France alone, furloughed workers and cut pay.

Manufacturers of automotive parts employ more people in the US than companies that build motor vehicles: 592,000 compared with 403,000. Many of the largest parts-makers are clustered in Michigan, a state critical to the outcome of November’s presidential election. 

Superior Industries International, an aluminium wheel maker in suburban Michigan, has closed factories and furloughed a portion of its 8,000-strong workforce, while tyremaker Goodyear, in the swing state of Ohio, has furloughed or cut pay for a further 4,000 employees.

In France and Germany, suppliers such as Continental, Valeo, and tyremaker Michelin put tens of thousands of staff on partial employment schemes. 

While car manufacturers and their largest component providers have access to multibillion-euro credit lines, capital markets and government loans, the network of smaller, often family-owned, parts makers that feed into the global automotive industry cannot afford to take on large amounts of debt.

“The situation is tough,” said Dräxlmaier Group, a German supplier that makes bespoke electronics, instrument panels and interior lighting for premium car brands around the world, and delivers directly to big auto plants.

The company, which builds custom-made parts to order, had to close its factories immediately when the car manufacturers’ shutters came down, and send tens of thousands of workers home, while absorbing the enormous fixed costs of keeping trained staff on their books.

“In a lot of the countries in which we produce, such as Tunisia, Hungary and Mexico, Kurzarbeit [Germany’s state furlough scheme] is not available, and we have to pay staff costs ourselves,” it said.

Even once lockdowns are lifted, it is likely to take months for the supply chain behind the roughly 30,000 individual components in a car to be fully functional. 

“One little company can really mess up the supply chain for several automakers,” said Kristin Dziczek, vice-president of industry, labour and economics at the Center for Automotive Research in Michigan.

Industry executives warn that replacing a single supplier could delay the reopening of a major car plant for weeks, while a new provider is located, equipped and certified.

“We know that we are as weak as the weakest link in our supply chain,” said Jacques Aschenbroich, chief executive of Valeo, one of the largest French parts suppliers which specialises in sensors and high-end equipment, including for self-driving cars. 

“We produced 8m products a day before the crisis, using 3bn components in our 191 plants,” Mr Aschenbroich added. 

French finance minister Bruno Le Maire told the FT in April that for critical industries such as chemicals, aerospace and cars “if you are closing those factories, it won’t just be for two or three months”, because there was “a value chain behind that which is very complicated to restart”.

The industry-wide shift towards emissions-free vehicles, which threatens to wipe out much of the current network of combustion engine suppliers over the next two decades, has further complicated the situation.

In one of the first signs of suppliers’ vulnerability to the Covid-19 pandemic, Moll, a battery manufacturer based in a small town in Germany’s Upper Franconia that counts VW among its main clients, began insolvency proceedings at the end of March. It was left with little cash reserves after investing heavily in the development of lithium-ion technology for electric vehicles. 

“This crisis is simply worse,” said Gerhard Wolf, an analyst at Stuttgart-based LBBW. “It comes at a time when companies are undergoing a transformation.” 

Although the easing of lockdowns in some parts of the world offers hope for large manufacturers, any restart in production would depend on a simultaneous reopening of several large economies, many of which are only now feeling the full impact of the virus.

Henrik Henriksson, the chief executive of Swedish truckmaker Scania, said European authorities needed to co-ordinate. “Even if we have good co-operation in Sweden, we still need France, Italy, Germany, Spain too,” he said.

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The impending cash crunch has also raised questions about whether the current turmoil will drive long-expected consolidation among smaller suppliers. 

French government officials admit that even with the billions of loans and support they are giving the industry “consolidation has to be on the table”.

One European dealmaker said they expected to see stronger suppliers buy out weaker players, potentially at the behest of carmakers themselves in order to keep the chain intact.

“You can see a situation where some are bailed out and given a lifeline,” said the executive. “You need to ask whether that is right. You can see a lot of consolidation coming from this. It should happen.”

Additional reporting by Victor Mallet in Paris and Richard Milne in Oslo

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