automotive Archives

Coronavirus is Disrupting Indian Industry

Automotive Industry | By Bob Gill • 03/19/2020

While the impact of coronavirus on Indian industry has so far been moderate, India’s extremely high import dependence on China means there are significant ramifications for Indian industry. Of the top 20 products that India imports from around the world, the average Chinese share is close to 30 percent. Sectors in India that have been are impacted by the coronavirus in China include shipping, pharmaceuticals, automobiles, electronics, textiles, and solar power. (All information sourced from Confederation of Indian Industry (CII) report, 16 Feb)

Coronavirus and the Electronics Industry

China accounts for 45 percent of India’s total electronics imports and sources close to 90 percent of certain mobile phone parts from the country. Extended supply chain disruption will negatively impact India’s electronics industry primarily in the form of production reduction. The mobile phone industry in India has already started running out of stocks and serious disruptions are expected for this sector of the industry.

Local manufacturing of electronics components is being considered and the CII recommends inviting companies from Japan, Korea, Taiwan, Europe and US that are presently in the supply chain, to set up plants in India.

Coronavirus and the Pharmaceuticals Industry

While India is one of the world’s top drug exporters, the Indian pharma industry relies heavily on imports of APIs (active pharmaceutical ingredients) and intermediates, with some 70 percent of APIs sourced from China. For many critical antibiotics and antipyretics, dependency on API imports from China is close to 100 percent.

While not at crisis level yet, the coronavirus outbreak has resulted in shortages and potential price increases of generic drugs in India, and Indian pharmaceutical companies are now considering supply from other countries.

Currently, Indian manufactures do not have a compelling case to manufacture APIs locally, due to inadequate infrastructure, increased compliances, cumbersome processes for environmental clearances, and lack of incentives and support from the government.

Coronavirus and the Automotive Industry

The shutdown in China has affecting the imports of components affecting both the Indian auto manufacturers and the auto component industry. However, current levels of inventory seem to be sufficient for the Indian industry, at least for now. The impact on individual Indian companies in this sector varies depends on the extent of their business with China. An extended shutdown in China is expected to result in an 8 to 10 percent contraction of Indian auto manufacturing in 2020.

With China dominant in the electrical vehicle (EV) battery supply chain, the impact on India’s fledgling EV industry may be greater. The Indian EV industry is dependent on Chinese imports especially for lithium chemicals used to make cathodes and battery cells, as India seeks to build lithium-ion battery manufacturing plants.

Coronavirus and the Solar Power Industry

Chinese companies dominate the Indian solar components market, supplying about 80 percent of solar cells and modules. The coronavirus situation has led to about delays in Chinese production, quality checks and transport of components. As a result, Indian solar companies have started facing a shortfall of raw materials needed for solar panel production.

Coronavirus and the Export Implications

When it comes to exports, China is India’s third largest export destination and accounts for 5 percent share. The demand-side impact will be felt in sectors including organic chemicals, plastics, fish products, cotton, and ores.

The CII refers to an “unprecedented opportunity” to position itself as a production hub for the world and an alternative to China. However, for this to be successful a number of policy actions need to be instituted urgently. These include forming an inter-ministerial task force with industry participation to create awareness on India as a sourcing destination; encouraging Chinese companies to set up in India; enhancing export credit and insurance schemes; and building up competencies in trade facilitation and logistics to Chinese standards.

Coronavirus and the Automotive and Pharmaceutical Supply Chains

Automotive Industry | By Chris Cunnane • 02/12/2020

Earlier 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.”

Guest Commentary: Moving Parts: Effectively Managing the Aftermarket Auto Parts Supply Chain

Automotive Industry | By Paul McDonald • 07/25/2013

When an automobile parts dealer or a business in the auto service parts retail network makes a request to its suppliers to fulfill an order, there is an expectation that the right component shows up at the right place, in the right time frame, at the right cost. After all, at the end of the line in this complex supply chain fulfillment cycle is a customer with a vehicle waiting for a repair part. That customer has the choice of going to a dealer’s service department, or an independent shop in the service parts retail network. The complexities of the aftermarket auto parts supply chain and the physical movement of millions of individual parts made by manufacturers around the world demands flawless execution at every link to satisfy that customer.

Accurate and timely visibility, process expertise and understanding the intricacies involved in managing the physical movement of goods and inventory are some of the acute challenges within the aftermarket auto parts industry. In order to win the business of a car owner, both dealers and the automotive service parts retail network must overcome these challenges and position themselves as the most attractive option. A third-party logistics provider (3PL) can address these issues and help implement solutions that allow a dealer or retailer to win in this continual competition for customers.

With parts crisscrossing the globe, one of the benefits of working with a 3PL is gaining the ability to offer assurance of a part’s status at any point in the supply chain. This is where visibility is critical. 3PLs provide an accurate view of the flow of inbound and outbound goods. Driven by continual technology investment, the accessibility of as-it-happens information is increasing by the day. By extension, the availability of supply chain information has altered the aftermarket auto parts landscape. The ripple effect of on-demand information continues as customer expectations surrounding status updates have also increased. The bar is constantly being raised regarding the importance of the reliability and efficacy of that information.

Dealers and other providers in the automobile service parts retail network that elect to navigate the aftermarket auto parts supply chain without the assistance of a 3PL run the risk of losing inventory control, negatively affecting customer service and increasing costs. A 3PL delivers the tools, information, and importantly, the people and process rigor to ensure accurate, timely execution. Most parts suppliers and their dealer or retail networks do not have the expertise to manage their own supply chains. By leveraging the experience and knowledge of a strong 3PL, stakeholders can focus on customer relationships, more efficient and accurate inventory management and increasing sales.

The movement of parts along each stage of the supply chain can also be a challenge. When a parts dealer or retailer needs 500 SKUs of windshield wipers and 50 pallets of mufflers, those parts do not arrive on separate trucks originating from each factory that produces them or distribution center that ships them. A 3PL can bring a robust transportation management solution integrated with technology to coordinate the collection of those parts from their points of origin and provide consolidation services to facilitate the receiving, sorting, repackaging and delivery of those auto parts to a dealer or retailer. Monitoring each stage along the way with timely data will quickly illuminate inefficiencies, identify possible corrective actions and allow for uninterrupted service.

Issues surrounding effective inventory management are also commonly identified as roadblocks to efficiency. By taking advantage of the insight and expertise of a 3PL, dealers and the auto parts retail network benefit from increased transparency, visibility, clear communication and a fuller understanding of what happens at each stage of the supply chain. This information will position dealers and retailers to effectively manage the balance between over-ordering and warehousing unsold stock, and delayed fulfillment due to under-stocked items — both classic outcomes of a lack of timely visibility and rigorous process controls that lead to poor situational awareness and mismanaged inventories.

The aftermarket auto parts industry presents one of the most difficult and complex supply chains to manage. Whether a dealer or retailer needs one pallet consisting of 10 different products, or 100 pallets loaded with 1,000 parts, a 3PL provides the same seamless service. The right 3PL can implement systems that provide critical data integration and in-depth visibility to achieve results with greater efficiency and lower cost than a dealer or automobile service parts retailer can achieve otherwise.

Paul McDonald is Director of Business Development at Menlo Worldwide Logistics, a $1.6 billion global provider of logistics, transportation management and supply chain services. Named to his current position in 2008, McDonald is responsible for sales and marketing activities in Menlo’s Automotive and Heavy Industrial Group. He joined Menlo as a senior manager of operations in 1997.

Supplier Risk Management and the Automotive Supply Chain

Automotive Industry | By Steve Banker • 07/31/2009

I came across a white paper from PriceWaterhouseCoopers (PWC) called “Seizing Opportunity: Linking Risk and Performance”. In one place, the paper highlights a “global automotive manufacturer” that was “experiencing significant losses due to a key risk in its supply chain: supplier bankruptcies.” The company faced the direct costs of those failures, as well as the “indirect costs derived from the poor product quality, unreliable supply, and management distraction” that resulted from the supply chain disruptions.

Not so coincidently, there was an article in The New York Times yesterday about Delphi, the troubled auto parts supplier, being on the verge of emerging from bankruptcy after almost four years. According to the article, “The new bankruptcy plan would involve Delphi’s debtor-in-possession lenders—whose loans totaling $3.4 billion have kept the company operating in bankruptcy—taking over most of the supplier’s assets. The lenders, led by hedge funds like Elliott Management and Silver Point Capital, plan to forgive their loans in exchange for taking control of the company, a process known as credit bidding.” General Motors (GM), “which spun off Delphi in 1999 and remains one of its biggest customers, would provide more than $3 billion in financing to take back four factories and the supplier’s steering business, according to people briefed on the matter.” I’m guessing this $3 billion GM investment is probably the “direct costs” referred to in the PWC white paper.

The white paper says that the unnamed auto company now has an “integrated approach” to risk management: “By analyzing its suppliers’ business environments, identifying leading risk indicators, and conducting risk-adjusted evaluations of its suppliers pricing proposals,” everything is now better. The automaker can now make more “informed supplier selection decisions [and] also quickly identify troubled suppliers and take early corrective action.”

GM can see the moon now that the barn has burned down.

At one level, it is easy to blame the automakers for this problem. They have squeezed their key suppliers so hard, for so long, that these kinds of disruptions are far from surprising. But arguably, the hard-headed American carmakers just could not help themselves. Michael Porter’s five forces model, which just about every MBA student learns, identifies some of the industry dynamics that helped lead to this outcome.

Porter's Five Forces Model (click to enlarge image)

One of the five forces is the bargaining power of suppliers. When your products are not that differentiated, and you have relatively few customers and they represent a very high proportion of your sales, then your company is at a severe disadvantage in procurement and pricing negotiations. Further, the high union wages complicated the issue for both the Tier 1 suppliers and the automakers.

There are those who argue that Japanese automakers have managed these Tier 1 relationships better because of Japanese culture, the keiretsu industrial structure (the tight-knit family of industrial companies, banks, and trading partners common in Japan), or just because Japanese executives are smarter.

How could the U.S. automakers have done better? Hindsight is 20/20, but arguably well structured gain-sharing relationships, also known as performance-based contracts, could have helped to avoid this. Performance-based contracts can be equated with “lean” principles because finding and eliminating waste, and then sharing the savings, is a key element of these types of contracts (see “Performance-based Outsourcing: What’s in it for ‘We’?”). My impression is that automakers did almost the opposite: they demanded their Tier 1 suppliers to reduce prices every year, and told them that if they were just more efficient at manufacturing, they would not suffer any margin losses.

In any event, performance-based contracts, particularly those focused on outsourced logistics, is a key focus of our research here at ARC. It will also be the theme of our upcoming supply chain seminar, part of our annual user conference to be held February 8-10 in Orlando (details coming soon, but mark your calendars).

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