Auto makers and their suppliers are reeling from demand, supply chain and business continuity shocks related to their production and work force.
They're facing revenue shortfalls, supply chain shortages and overcapacity, perhaps for more than the next 12 months.
The spread of the novel coronavirus (COVID-19) and its effects on individuals, companies and economies is rippling through the world from the virus' epicenter in Wuhan, China, where the respiratory disease was discovered late last year.
China responded with quarantines that shut or slowed down 500 manufacturing facilities by the end of January. The country accounts for 15.4 percent of global products and services produced, so it wasn't long before the COVID-19 outbreak started to hurt the world's gross domestic product growth.
Then, the virus spread and Europe began taking quarantine measures in early March, first in Italy then Spain, Germany and France.
Now the U.S. is facing the full onslaught of the pandemic, with 887,000 global cases and 45,000 deaths from the virus as of April 1, and those numbers are expected to rise drastically.
In the midst of it all, risk management teams are facing unprecedented challenges. A lot of effort already has gone into forcefully or willfully winding down operations following the shuttering of factories by original equipment manufacturers (OEMs) and top tier suppliers in Europe and the U.S.
At this point, the focus of the C-suites should be on establishing a liquidity office and modeling restart scenarios, according to Joern Buss, a Detroit-area partner of the New York-based management consulting firm Oliver Wyman, who follows the global automotive and manufacturing industries.
Buss was among the recent presenters for a COVID-19 webinar offered by the Original Equipment Manufacturers Association. He shared some highlights and other insights with Rubber & Plastics News.
"People have asked how does this compare to 2008, or can we compare it to 2010-11. The answer is no," Buss said in an interview. "This isn't apples or oranges. This is a watermelon. This is big and we haven't seen it before."
However, businesses do have tools and processes to manage aspects of the crisis, and they need to use them, Buss added.
"We know how to manage liquidity, we know how to manage a rapid downturn, we know how to manage rapid upturns, but this time complexity comes in," he said. "This is different by region. It's different by company. Previous risks were more contained."
While most companies have some crisis teams and plans in place, Buss said there's a wide variance as to the experience of the team members and how comprehensive their plans are. Large companies have in-house consulting teams and crisis experts because they have sites—and problems—all around the globe.
"We see many smaller and medium-size companies where the C-suites have daily reportings, and maybe a project manager and some support working on this," Buss said. "That's good. It's the right people who understand the business and how to take it forward, but they're often not versed and experienced to manage something they've never managed before."
During the pandemic, companies with a weak liquidity position, or who are doing business in a stressed sector, likely will run into financing needs and face covenant breaches as banks are struggling to deal with distressed debtors.
Buss said the liquidity office should determine cash-flow risk and come up with actions to get through short-term crunches. Rapid action is needed to reduce costs and improve cash flow. Businesses should cut discretionary spending and adjust pricing if possible, he said.
They should reduce fixed costs, and try to manage cash and line up sufficient funding for the worst-case scenario, Buss said.
The goal is to right-size capacity and decrease spending to lower the break-even point, Buss said.
"At this point in time, if you're under constraint already and have supply disruption, look for liquidity and manage it very, very hard," Buss said. "The manufacturing industry is very high cap-ex exposed, so managing liquidity is very critical. If you run out of liquidity, you can forget a restart and shut the doors."
While some OEMs have provided supplier liquidity assistance in the past in the forms of expedited payments or advances, it's only happening very selectively right now, Buss said.
"At first, in China, that was a standard response. You see a critical supplier have issues and you help. You send a team or provide liquidity. The problem is it's too late," Buss said. "The OEMs are under pressure, too, and that has dialed down to a minimum that's necessary."
It's also time to reach out to secure the trust of lenders and consider options of alternative sources of financing, such as state aid and debt funding, Buss said.
Ramping up again
Disruptions in the supply chain can be managed if businesses are transparent and understand their customers' situations, according to Buss.
"That's all about open communication, and it can solve a lot of problems and anticipate a lot of needs," he said. "What worries us more is the demand. With everyone staying home—from the end customer to the industrial customers—demand is on hold. The question is for how long? That's what we're talking about now to pretty much everybody."
Company executives tasked with managing the restart of factories are wondering if they should plan for a soft restart or a steep ramp up. Buss said he gets a lot of questions but a common one is: "How do I perceive and manage this to prepare my supply chain and prepare my people to come back?"
Nobody knows, Buss said, so he recommends being more conservative than optimistic.
While China is recovering and manufacturing is ramping up again, parts of Europe are still working on flattening their virus spread curves, and the U.S. is in its early efforts to do the same.
"I'm personally more concerned about the U.S. because we still see many industries having not taken the type of restrictions that we saw with the manufacturing industries," Buss said. "A lot of things are still running because it is such a big country. Their might be more exposure issues in the U.S. than Europe."
In addition, India has become a concern. While not as big as China, India is a significant part of the global supply chain, and many rubber component suppliers are based there.
"If we see major issues in India, we're going to have another problem," Buss said. "It's another place we're watching very closely."
The Oliver Wyman firm suggests OEMs and suppliers start simulating possible ramp-up scenarios to assess process and product readiness. Consider demand and shipping sequence, model mixes, line speeds and machine down times, and also identify potential bottlenecks.
"For some suppliers that we work closely with, it is a very stressful time with many unknowns," Buss said. "It's hard to predict, so it is all hands on deck."