Global auto makers and suppliers are scrambling to respond to the massive dislocations in their supply chains caused by the coronavirus that broke out in China.
How did we get here? China does offer colossal market opportunities and unmatched industrial scale. But it is not a place to put all of your eggs. No market is.
But American auto makers and suppliers could not resist. For the past 20 years, they put virtually all of their Asian investments into the People's Republic.
We know what happened next: Chinese incomes soared. Car sales exploded from 1 million in 2001 to 24 million in 2019. China became the world's largest producer and consumer of vehicles—by far.
Times were not just very good; they were sensational. "We are making more money than God," the president of GM China confided over a lunch during the halcyon years.
Suppliers such as BorgWarner, Lear, Magna and Aptiv followed quickly. They built scores of factories employing hundreds of thousands. For good reason: China was a profit machine like no other.
In fact, American companies grew so comfortable with their successes in China that they withdrew from other powerhouse Asian markets, including Japan, Vietnam, Indonesia, Thailand and India.
A sudden jolt
But winter 2020 has delivered an abrupt shock by a highly contagious virus. Car and parts plants have been mostly idle for weeks.
Baidu's AI-powered Migration Index indicates that only one-third of employees in major cities were back to work in the last week of February.
Demand for cars has nosedived. Sales in the first half of February were down 92 percent, according to the China Automotive Dealers Association. "It is not good to meet customers face to face," a BYD dealer in Shanghai told me last week.
American companies are understandably shaken. My company, ZoZo Go, has never been busier. Since early February, we have gotten waves of requests for support from supplier risk-management teams across the industry. They understand the need to find parts supply outside of China. A comment from one executive brought home the gravity of the situation: "We (are) ass-deep in this one."
When will China get back to full production? Recovery will vary by region and by part. But late April is probably the most optimistic timing.
How can they diversify supply chains for the future? There is a delicate balance to strike. Companies need to remain engaged with China, a towering market that will continue to command respect.
At the same time, smart companies should move quickly to reduce risks to the supply chain.
The Jeep Wrangler offers one illustration of how a China-centric supply chain can go wrong: The Wrangler is assembled in Toledo, Ohio. But Wrangler's steering gears are built 7,500 miles away in a factory in Wuhan, China—epicenter of the coronavirus outbreak.
Dealers in the U.S. are facing imminent risks, too. Chinese companies manufacture a huge number of replacement parts.
Amplifying the anxieties: uncertainty about the reliability of information coming out of China as the country battles the coronavirus.
Now, no one says the transition away from China will be easy.
There are no other countries in Asia quite like China, with its scale, infrastructure hard-working labor force and boundless ambition.
But there are high-potential markets and industries that will rack up growth during the next decade.
- Thailand produces 2 million high-quality vehicles a year, half of which are for export.
- Indonesia builds a million vehicles a year. That number will only get bigger as incomes rise in the world's fourth-most-populous country.
- India last week welcomed President Donald Trump. Look for ever-stronger economic ties, especially as U.S.-China trade tensions show no signs of going away.
Smart companies already are starting to diversify. Apple, Google and Microsoft have announced plans to shift some production to Taiwan, Vietnam and Thailand.
The Chinese auto makers are spreading out, too. Shanghai Auto, China's No. 1 car maker, builds cars and small SUVs in Thailand, Indonesia and India. Geely, which bought Volvo in 2010, has taken a 49 percent ownership in Malaysia's Proton. Great Wall Motors, the Jeep of China, is buying plants from a retreating GM in India and Thailand.
Let's remember that the Chinese know a thing or two about risk management. Their version of "don't put all your eggs in one basket" goes like this: "Don't hang your life from (one branch) of a tree."
How about that for some vivid, wake-us-up imagery?
For U.S. auto makers, suppliers and dealers, the message is clear: Diversify markets and supply chains in Asia, starting right now.
This column first appeared in Automotive News, a Detroit-based sister publication of Rubber & Plastics News.