Coronavirus and the Automotive and Pharmaceutical Supply Chains

coronavirusEarlier this week, the death toll from the Wuhan coronavirus rose to over 1,000 people, invoking memories of the 2003 SARS outbreak. However, the coronavirus has yet to be contained and appears to be more contagious than SARS. While the human aspect of this outbreak is clearly the biggest story, the virus is causing major disruptions in global supply chains as well.

China’s economy has grown significantly over the past twenty years and is now a piece of imports and exports for all major world economies. This outbreak has caused companies to start rethinking their overall supply design and contingency plans. While supply chain risk has always been a part of the overall planning process, the impact of coronavirus on the global supply chain has certainly brought supply chain risk management to the forefront of company’s minds.

As my colleague Steve Banker pointed out yesterday, the global high-tech supply chain has been hit particularly hard. But other industries are feeling the impact as well.

The Impact of Coronavirus

One of the biggest questions people aren’t necessarily asking but should be is “what is the impact on logistics?” Considering China is a major manufacturing hub for the world, figuring out exactly how products going to get to consumers has become a bit more complex. Air carriers have begun suspending their flights, and certain borders have been essentially closed to every other mode of transportation. Some countries are looking at completely banning all products from China until the coronavirus outbreak has been neutralized.

The timing of the coronavirus is a double-edged sword, and you can look at it from both the positive side and the negative side. On the positive side, the lead-up to Chinese New Year is a good thing. Factories normally shut down for the holiday, which means that lots of inventory has been shipped ahead of time. In the two weeks leading up to the holiday, there is a general surge in volume as companies know that for a two-week stretch, not much will be happening from a production standpoint. This ensured that cargo left China before the outbreak hit.

On the other side, however, the timing can be considered bad. In the normal scenario, operations usually resume by mid-February when all workers return. However, Chinese New Year could certainly delay the re-opening of factories and warehouses as families travel to be with each other, which has sped up the spread of the virus. With the quarantine in place, there is no real clarity on when normal operations will resume. For some factories, due to the economy, tariffs, and duties, the answer could be never.

Coronavirus and Automotive Parts

On Monday, Steve Banker and I had the opportunity to speak with Razat Gaurav, CEO of Llamasoft. Razat had some interesting takes on the outbreak, especially as it relates to the automotive and pharmaceutical supply chains. On average it takes 30,000 parts to make a finished automobile. Due to the virus, production facilities have already indicated that they will have lower than normal parts volumes. This has left companies scrambling to make contingency plans. During my conversation with Razat, he mentioned that inventories for most of these automotive parts are managed on a lean just-in-time basis. This means that, on average, companies have anywhere between two and twelve weeks of buffer inventory on-hand for automotive parts. As production volumes are decreasing, this has the potential to cause quite the global shortage of parts. The buffer inventory will only last so long, and once the pre-holiday supply runs dry, the industry is going to be in serious trouble. According to Gaurav:

“Most OEMs single source components for new vehicles and China is a large supplier of those. Thus, there is exposed risk. The automotive industry has been going through a ‘regionalization’ trend for the last 5 to 8 years with major hubs emerging in Mexico (for the North America market), Eastern Europe (including Poland, Romania, Slovakia, Czech Rep), Morocco, and China. Even so, there is a ripple effect in other parts of the world.

For example, Hyundai is one of the first automotive companies announcing closures outside of China, at its South Korean factories; France’s Renault also announced a shutdown in its South Korea facilities. Fiat Chrysler warned it may need to halt production in one of its European plants due to a shortage of parts. While we have talked a lot about the manufacturers themselves, the impact on the supplier base is significant as well.”

Coronavirus and Pharmaceuticals

Another industry that is feeling the impact of the coronavirus is the pharmaceutical industry. The average buffer inventory for the pharmaceutical industry is between three and six months. However, this does not tell the full story. Gaurav mentioned that China is responsible for producing 40 percent of the active pharmaceutical ingredients (APIs) for the pharmaceutical world. Additionally, China supplies 80 percent of key starting materials (KSM’s), which are the chemicals in APIs, to India. Put together, this represents 70 percent of all APIs across the world.

Due to this fact, the risk for disruption is even higher within the pharmaceutical industry. While companies may have alternative sources for either the drugs themselves or the active ingredients, even those supplies likely require ingredients that come from China. Much like other highly specialized items, pharmaceuticals would require months of lead times to set up new manufacturing facilities. Given the amount of testing, not to mention the initial investment, that is required to get a new plant up and running, companies are instead looking those alternative suppliers, even though it could take a significant amount of time to get the supplies that are necessary.

Coronavirus and Hockey?

One more example of coronavirus impacting the supply chain comes from an unexpected source: the National Hockey League (NHL). Hockey players, like most professional athletes, are very particular about their equipment. This is especially true of their sticks. The two largest suppliers of hockey sticks, Bauer and CCM, account for about 75 percent of the sticks in the NHL. According to reports, the work shutdown in China has caused a stoppage of stick replenishment. With how often players break their sticks, this could be a big problem as the outbreak and hockey season wear on. Stick suppliers have said that they have the majority of sticks needed for the season in storage in North America now, but did admit that the halt in production has raised concerns.

Final Thought

The coronavirus continues to spread throughout China, and the human toll cannot be ignored. Nor should it. However, there are other ramifications from the outbreak, perhaps most notably on the global supply chain. Two industries in particular are feeling the effect: automotive parts and pharmaceuticals. These industries are dealing with delays and shortages for required components to make a final product. This can have last effects on the companies and their consumers. For automotive parts, it is a matter of factories not being able to produce vehicles as needed. For pharmaceuticals, it can be a matter of life and death. For both of these industries, the reliance upon buffer inventory can only last so long. As Razat Gaurav said to me at the end of our call, “Thank God for buffer inventory. If it gets depleted, it will create huge demand-supply imbalance in the global landscape.”

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