Corona Damages Mechanical Engineering Supply Chains

mechanical engineeringThe mechanical engineering industry is feeling the consequences of the corona pandemic with increasing force.  A very recent survey by VDMA, the German association for the mechanical engineering industry, was answered by 965 member companies and clearly shows this.  The share of companies whose operations are affected rose from 60 to 84 percent within two weeks.  Almost every second company affected (45 percent) suffers from “serious” or “noticeable” disruptions along the supply chain.  Only 5 percent have been spared so far.  For example, parts and components that were ordered in Asia a few weeks ago did not arrive at the local plants.  In addition, there are also problems with European and German suppliers.

According to the latest survey, supply chain disruptions are particularly prevalent in Italy (75 percent of those affected), Germany (55 percent), China (51 percent), France (36 percent) and the USA (25 percent). “However, the situation in China and South Korea seems to be easing slightly.  In addition, many mechanical engineering companies report a significant increase in orders from their Chinese customers”, explains VDMA chief economist Dr. Ralph Wiechers.

Reduction of Investment Projects

In the meantime, machine builders have also become much more pessimistic about the expected loss in sales.  Almost 96 percent of companies expect decline in sales, which they will no longer be able to make up for in the remainder of the year.  A good 60 percent of these put these declines at 10 to 30 percent.  In order to compensate for these, three quarters of the machine builders surveyed have already made capacity adjustments, mainly via working time accounts, but also in the form of hiring freezes and short-time work.  Downsizing – even of parts of the core workforce – is already an issue for 12 percent of the companies.  Almost three quarters of companies are considering cutting their investment plans for 2020 due to uncertain business prospects and liquidity shortages, half in the range of 10 to 30 percent another quarter expect to cut more than 50 percent.

David Humphrey and I have recently calculated 5 different scenarios based on ARC’s standard methodology and presented COVID’s impact on automation markets in a recent ARC WebWindow that can be viewed here or on YouTube.

In the current economic situation, supply chain disruptions are a critical phenomenon. While most supply chains have proven to be able to recover quickly, the most critical aspect is currently the demand side, all the way down to the consumer. Especially in economies with less developed social security systems, this demand shock can be huge.

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