The coronavirus outbreak has put Canadian automakers and their suppliers on high alert as factory shutdowns in China threaten to disrupt the global supply chain.
So far, the Canadian industry appears to be functioning virtually normally, although experts said it’s only a matter of time before the impact of the factory shutdowns is felt beyond China, prompting some manufacturers to consider sourcing production closer to home.
But automakers, including Volkswagen and Ford, have temporary closed assembly plants for varying lengths of time in the United States and Spain, respectively. Meanwhile, a work refusal over coronavirus fears by Unifor members at FCA’s minivan plant in Windsor, Ont., idled the plant for about 24 hours last week. And one FCA worker at a plant in Kokomo, Ind., tested positive for the virus.
As of Sunday, there were 249 confirmed cases — and four probable cases — in Canada.
“Longer term, I believe the coronavirus event coupled with the trade disputes we have seen may cause all of us to review our supply chains,” Rob Wildeboer, executive chair and co-founder of Martinrea International Inc., said on a quarterly conference call with investors on March 5.
“For example, I think this will add to a trend to local insourcing or restoring to North America, which frankly could be very good for us.”
Both Martinrea and Magna International have limited international travel in response to the virus that first emerged in Wuhan, China — a city of 11 million — in late December and has since spread to more than 100 countries, including Canada.
Magna on Sunday said it still has five employees in China who have tested positive and “all are doing good.”
“The majority of our operations in China have resumed production,” the company said.
Few Canadian companies import auto parts directly from China and most are electronics, or small pieces such as fasteners, bolts and seals, said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association.
“Right now, the industry is working around the issue in China. It’s incurring costs having to source stuff in other places and increasing risks because they’re going through contingent inventories without an end in sight,” Volpe told Automotive News Canada. “None of this is good news for anybody.
“Some of my members have suggested where we’ll see the real issue is a few months out. The dearth of some components today might show up in a few more months,” Volpe said.
To get around the disruptions in China, some automotive suppliers have been paying at least 10 per cent more to ship parts out of China by alternate routes, or up to 50 per cent more to source those parts closer to home, Volpe said.
“We are talking about parts that represent less than one per cent of overall cost but whose absence could trigger a halt in major module production that would be a serious issue in just-in-time production.”
Mike Bilton, chair of the Canadian Association of Mold Makers, estimated five to 15 per cent of parts normally shipped from China to Canada to Tier 1 suppliers have been held up by factory shutdowns in China.
Bilton said some automakers were already asking what his backup plan was for alternative sources of parts.
“That means I have to spend time and money looking for new suppliers. I have to vet them. Suppliers say they can make that component, but it may be a knockoff that doesn’t meet the technical specs.”
Depending on where the automaker is located, suppliers might be mandated to source components from certain regions, Bilton said. For the Detroit Three, that means looking to North America, but for Japan-based carmakers, it could mean other suppliers in Asia.
“We just don’t know where those suppliers are yet.”
OUTPUT GOES ON
Major parts companies in Canada were downplaying the impact of the decision by Chinese authorities to close factories in the city of Wuhan in February in a bid to limit the spread of COVID-19.
Most automakers typically hold 30 to 60 days’ worth of inventory and many had stockpiled additional product just before the weeklong Lunar New Year holiday in China in late January.
Magna International, the world’s third largest auto parts maker, said Sunday that the majority of production at its 54 plants in China had resumed, though not at full capacity.
China accounts for just five per cent of its US $40 billion in global sales, the company noted. Production outside China had not been affected, the Aurora, Ont.-based company said in late February. It has since banned employee travel to Japan, South Korea, Iran and northern Italy.
“We haven’t quantified what the impact will be financially because we don’t know yet,” CEO Don Walker said Feb. 28 after an investor day in Toronto.
Guelph, Ont.-based Linamar Corp., which was set to report its fourth quarter results March 11, did not respond to a request for comment.
Martinrea said the impact of the virus has been largely contained to its plants in China, which account for just 2.0 to 2.5 per cent of its global sales. Some of those plants also supply parts to its operations outside China, the Vaughan, Ont.-based company said.
“At some point we’ll be constrained there,” said CEO Pat D’Eramo.
“This will be a bigger concern if this thing drags on for a while. When does it start impacting customers and therefore impacting us?” said Martinrea CFO Fred Di Tosto.
Mark Nantais, president of the Canadian Vehicle Manufacturers Association, said there has been little impact on assembly plants in Canada.
“At this point we do not see any significant supply-chain issues in Canada and would likely be minimal in any case. In response to potential disruption events, business continuation plans are or would be introduced, and all companies have them.”
IMPACT IS INEVITABLE
China is so deeply embedded in the global automotive supply chain that it’s only a matter of time before the impact is felt in North America, said Kristin Dziczek, vice-president research at the Center for Automotive Research in Ann Arbor, Mich.
“It could cripple certain [vehicle] models or certain trim lines. I don’t think it’s going to lead to full-scale factory shutdowns in North America.
“With [the virus] now spreading into South Korea and Europe, it’s going to affect us. We’re not going to be immune,” Dziczek said.
But just how and where the shortages might pop up remains to be seen as the automakers play their cards close to their vest, she said.
Michael Dunne, chief executive officer of investment advisory firm ZoZo Go Inc., said every automaker is vulnerable to supply-chain disruptions.
The Jeep Wrangler, made in Toledo, Ohio, relies on steering gears made at a plant in Wuhan, he said.
“The good news for North American suppliers is most of their suppliers’ sources are in Shanghai and Guangdong, and those are in relatively good shape compared to Wuhan. They’re going to recover more quickly.”