Edmonton Journal

Automakers restart production amid raft of uncertaint­ies

Success or failure will ultimately depend on factors well beyond firms’ control

- NAOMI POWELL

Keith Henry knows he’s checked all the boxes for creating a “COVID -conscious” workplace.

His Windsor Mold Group, a supplier to North American automakers, has instituted new cleaning procedures, installed Plexiglas walls and limited workers to single entry and exit points. Temperatur­es will be vigilantly checked at every shift, social distancing rules enforced and protective gear distribute­d.

Yet, as his Windsor, Ont.-based firm takes its first tentative steps toward ramping up production in parallel with North American automakers this week — Toyota, Honda and the Detroit 3 have all begun bringing plants back to life — Henry is all too aware that ultimately, its success or failure will depend on factors well beyond his control.

“We’re at the mercy of customers and the supply chain, too,” said Henry, chief executive of the firm. “An outbreak, a lost link in the supply chain somewhere else, could shut down our main customer and immediatel­y impact all the rest of us in the chain. Nobody’s being reckless here, we’re all doing our best, but there are a lot of questions.”

Automakers restarting operations after an unpreceden­ted pandemic shutdown will be doing so amid a host of unknowns, ranging from the state of consumer demand and confidence to the advance of the virus itself. Looming in the background are concerns that smaller suppliers — many critical links in the supply chain — won’t survive another shutdown if it happens.

“Everyone’s facing the unknown, everyone at some level is taking a wild guess,” said auto industry analyst Dennis Desrosiers. “We’ve never in history seen something like this.”

Among the most immediate and worrying concerns is the state of the auto market itself. Pandemic quarantine­s worldwide all but collapsed auto sales for two full months, knocked millions out of secure employment and are likely to have a more lasting impact on the way people work and commute.

In Canada, auto sales fell nearly 75 per cent in April year-on-year, following an estimated 48-percent sales decline in March, according to estimates by Desrosiers Automotive Consultant­s Inc. The country’s auto dealers sold only 45,833 units in April, compared to 180,616 units during the same period last year.

As it stands, the industry is currently carrying about 90 days of inventory of light vehicles, roughly 35 days more than it would in normal times.

“Where is consumer confidence at? That’s the big question and we just don’t know the answer,” said Flavio Volpe, president of the Automotive Parts Manufactur­ers Associatio­n.

On one hand, lasting workfrom-home policies could crater demand for new cars or at least delay it. Roughly 80 to 90 per cent of vehicle purchases stem from “replacemen­t demand” that is, people buying new cars because their existing ones are too old or expensive to repair, noted Desrosiers.

“If people aren’t driving, they aren’t putting any mileage on their cars,” he said. “There’s no wearand-tear, that affects replacemen­t demand.”

On the other hand, concerns about the spread of infection on public transit could drive more consumers into private vehicles, he notes.

“More people may be looking at the suburbs now, not crowded downtowns, he said. “In that situation you need at least one car, maybe one per person.”

But as the pandemic wears on, sparking second waves of infection in other countries, a larger question revolves around whether enough Canadians will feel sufficient­ly secure in their jobs to commit $40,000 to $50,000 to a new car purchase.

“That’s the part I can’t fathom,” said Henry. “It’s hard to imagine that the auto industry, after having so many people out of work, is going to bounce back like nothing happened.”

Wherever it lands, the level of demand will have a direct impact on the capacity plants will operate at and by extension, their profitabil­ity — a major factor for both large auto firms and smaller suppliers who have been burning through operating capital as their factories sat on ice for two months.

Indeed, a plant operating at 50 per cent is typically running “at a loss” said Volpe. To make enough money to cover the cost of production and turn a profit, plants typically need to run at between 70 and 80 per cent capacity he said.

Major automakers “have gone for two months with zero revenue and they don’t have years of working capital on hand, they have months,” he said. “If that’s all they have, imagine what their suppliers have. So if production doesn’t pick up quickly and isn’t sustainabl­e, or if there is another shutdown because of outbreaks, liquidity will be the No. 1 issue for lower tier suppliers.”

With most cars containing an average 20,000 parts provided by hundreds of suppliers — more than 30 per cent sourced from companies outside North America — additional outbreaks in auto plants could carry even further reaching repercussi­ons. One weak link could be enough to snarl an entire supply line.

“These are very complicate­d global logistical channels populated by hundreds of companies,” said Desrosiers. “So it is staggering­ly important that this happen in a carefully choreograp­hed way. And if one element of a vehicle is sourced from a company that happens to be shut down — you’ve got a serious problem. That’s why what they are doing is so dangerous.”

Everyone’s facing the unknown, everyone at some level is taking a wild guess. We’ve never in history seen something like this.

 ?? WASHINGTON ALVES/REUTERS ?? Fiat Chrysler Automobile­s assembly workers get to work at a plant in Betim, Brazil, on Wednesday. As automakers bring plants back to life after quarantine­s worldwide, the state of the auto market itself is among the most immediate and worrying concerns. Auto sales have collapsed for two full months and millions have lost secure employment.
WASHINGTON ALVES/REUTERS Fiat Chrysler Automobile­s assembly workers get to work at a plant in Betim, Brazil, on Wednesday. As automakers bring plants back to life after quarantine­s worldwide, the state of the auto market itself is among the most immediate and worrying concerns. Auto sales have collapsed for two full months and millions have lost secure employment.

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