If you’ve been delaying that car repair, Jenni Newman has some advice: Don’t wait to take your car to the shop.
The coronavirus and its growing tally of sick and dead victims around the world have been roiling financial markets, prompting countless hand-washing reminders and ruining more than a few vacations, and that’s before anyone knows exactly how widespread the effect will be on the automotive industry, including your local repair shop.
But Newman, editor-in-chief of Cars.com, is among a growing chorus of industry watchers and insiders who say they expect a very real impact in the United States, including on the availability of parts needed for repairs. China, where the outbreak has been most intense, is behind only Mexico and Canada in the amount of imported auto parts sent to the United States, according to the Center for Automotive Research.
And as COVID-19 shows up in even more places, the effects will be felt in other ways, too.
“If you were thinking about doing a repair to your car, and I know for some people they may be delaying, perhaps it’s time to move that to the top of your list,” Newman said. “Better to get moving on this and get your car repaired rather than cross your fingers and hope everything turns out OK.”
The message so far from auto companies to dealers and beyond has been uncertainty about the impact — the Center for Automotive Research notes that most auto parts are still produced domestically — but that appears to be more a matter of timing and total severity. The interconnected nature of the global automotive supply chain and heavy reliance on China in particular for parts production mean the widespread factory shutdowns in an effort to contain the spread of the disease will eventually send ripples to the United States.
Michael Dunne, a top Chinese auto industry analyst, predicts the impact will be felt within weeks.
“China is quietly a source for many replacement parts in American dealerships. Dealers are bound to feel a crunch in mid- to late-March as their inventory dwindles,” said Dunne, who is CEO of ZoZo Go.
U.S. parts imports from China tripled from 2010 to 2018, making production here more vulnerable to problems in China than ever before. However, automakers commonly have a one- or two-month inventory of parts that come from as far away as China, so car production here hasn’t been affected yet.
GM chair and CEO Mary Barra said her company’s North American production is secure well into this month.
But lots of stuff ships from there
China has become a major source for the electronics that control nearly every system in a modern car.
“We have also noticed China’s emergence as a major supplier of high volume and relatively low margin components, such (as) brake pads or throttle bodies,” said Matteo Fini, IHS Markit executive director of market research and analysis.
It can take weeks or months to add a second source for a part if the company or country you buy from is incapacitated, Fini said.
One Michigan-based parts manufacturer has already been navigating these troubled waters.
“If anyone here in the United States says they’re not going to be impacted by this, they don’t understand the gravity of this situation,” said Mary Buchzeiger, CEO of Lucerne International in Auburn Hills.
Lucerne has done business in China since 2003, so Buchzeiger knew this was serious.
She put together a crisis management team in the United States and Shanghai immediately. The teams are on the phone daily to mitigate the business risks from the virus outbreak.
“Whether it’s a tiny screw or a key component, there are parts that come from far and wide,” said Buchzeiger. “We need to brace for an impact. I don’t think we’ve seen the full effect of it now, but it’s coming.”
Buchzeiger has not traveled to China to oversee operations as she normally does. Lucerne has partnerships in seven production facilities in China where it makes chassis, pistons for powertrains and other structural components. Its customers are the heavy truck industry, Ford Motor Co., General Motors, Nissan North America and Harley-Davidson.
Only one of those plants is running with a full workforce. It’s in Shanghai and because Lucerne hired local people, they were not affected as much by quarantines. But the rest of the plants are still ramping up with only about half their workforce because of quarantines. None of her workers has gotten the virus, she said.
“We still can’t get into certain areas because of quarantine, so we have to use video conferences with the plant performing quality checks over video,” said Buchzeiger. “On-site audits are replaced with conference calls. You have to get creative.”
That creativity included asking her customer, Harley-Davidson, for help.
“They’ve had to step in by using their power in freight to get us planes to move our parts” to shipping yards, Buchzeiger said. “For a while, we couldn’t find truck drivers and they couldn’t cross borders so it’s very hard to move parts around and get them to the ships. But it’s lessening every day.”
She said shipping was delayed for about three weeks requiring Lucerne to use air freight that it didn’t previously plan for when budgeting.
“Luckily, we didn’t have to move large quantities, just samples so we kept (costs) to a minimum,” Buchzeiger said.
Two weeks of production, gone
Lucerne has lost two weeks of production though and because her company has some customers in China, Buchzeiger said the impact of the virus will ding annual revenues there by 30%. Lucerne’s China revenues are a small part of the business; the bigger part is in North America where she expects to take a 10% hit on revenues this year.
“We’re really agile, we’re in growth mode, but I’ve put off some of the hiring I was going to do,” said Buchzeiger. “We were supposed to launch a couple programs this quarter for heavy trucks and that got pushed off by a couple of months because nobody can travel to China right now.”
Stuck in the U.S.
Andrew Parrish, Lucerne’s vice president of Asian Operations, lives in Shanghai but is stuck in the United States. He and his family were here in December when the virus erupted and cannot get back into China, Buchzeiger said.
“He’s a U.S. citizen who’s lived in Shanghai for 13 years,” Buchzeiger said. “His kids are doing homeschooling here for now. He’s running the operations via web calls every day.”
Mary Gallagher, professor of political science and director of the Lieberthal-Rogel Center for Chinese Studies at the University of Michigan, said part of the production issue in China is that even if the government appears better able to limit the spread of the virus than initially, factories that are operating are doing so without a full workforce.
Many factory workers are from rural areas and left the cities for the Chinese Lunar New Year holiday. Those workers are considered migrants and are being restricted in their return through quarantine, not necessarily by the national government, but by local governments, Gallagher said.
“Migrants are having trouble getting back in the places they work,” she said, noting that it’s possible it may be harder because of the virus to attract workers as well.
Supply could hurt new car production
Jonathan Smoke, chief economist for Cox Automotive, said information on specific auto industry production problems remains limited, but examples are likely to unfold. Potential disruptions relating to Hyundai’s Palisades production in South Korea, for instance, will likely become a concern for U.S. Hyundai dealers at some point.
“The bigger concern for new vehicle sales this spring will be supply disruptions,” Smoke said.
The impact from supply chain disruptions could drop new vehicle sales this year to as low as 16 million, down about 1 million from 2019, according to one possible forecast, but Smoke said Cox Automotive believes 16.6 million vehicles sold is still possible.
“Our model did not consider the U.S. seeing outbreaks that lead to closures, quarantines and travel restrictions,” Smoke said. “If that happens, the United States is likely to enter into a recession, which would lead to much lower auto sales.”
Cox Automotive stated that right now it does not appear that the U.S. car and light truck market in February was affected in any way. But March sales will be closely watched. Much will depend on how the spread of the virus unfolds, how it is contained and how the financial markets react.
The Federal Reserve’s survey of business conditions recorded spots across the country where manufacturers noted problems with supply disruptions and shipment delays because of the coronavirus.
The survey, known as the Beige Book, reviewed regional economic conditions in 12 Federal Reserve Districts. The February report, which includes information from in-person and phone interviews, was released March 4.
Despite overall bullish expectations among manufacturers, the Fed’s Philadelphia regional bank reported that several firms cautioned that the emerging coronavirus may disrupt supply chains soon, with two firms reporting delays already.
While some are looking to source parts elsewhere, the Fed’s contacts explained that it can take three months to get a part into production and longer for testing and redesign.
The Fed’s Chicago regional bank noted that some manufacturers reported low inventories of some parts or supplies that were produced in China because of disruptions from the coronavirus outbreak.
“While most said the impact had been minimal so far, many expected a larger effect if the disruptions continued much longer,” the report stated.
David Sowerby, managing director and portfolio manager for Cleveland-based Ancora Advisors, said he would expect the economic data to get weaker in the next few months in part because of the troubles in the supply chain relating to the coronavirus outbreak.
Sowerby said he heard a company that builds seat components give a presentation this week stating that the manufacturer has 5,600 employees in China. And while 15 of the 16 facilities are up and running, the CEO noted that the facilities are currently operating at only 50% capacity. The last facility is expected to be up and running in mid-March. It’s important to note that China was slowing before the virus, Sowerby said, so some of that decline is not related to the coronavirus.
Sowerby declined to name the company but said it is not based in Michigan.
“Like many companies,” Sowerby said, “they will give more details at the end of this quarter when they officially report earnings.”
Dealers prepare and worry
At Extreme Dodge Chrysler Jeep Ram in Jackson, car sales and service parts deliveries have been “status quo,” said Mark Trudell, general manager.
“But the longer (coronavirus issues) go, who knows?” Trudell said, adding that most of the parts he uses in repairs are not from China.
At a recent meeting with dealers from California, Texas, Florida and other parts of the East Coast, Trudell did not hear of any impacts from the coronavirus on service or sales business yet.
Still, he is taking precautions with his staff and customers’ health.
“We’ve always had hand sanitizer for our customers, but we are being diligent. If someone is sick, they stay home,” Trudell said.
Jim Seavitt, president of Village Ford in Dearborn, said his service business continues to receive parts and is humming along as usual, but new car sales have slowed and he believes it’s due, in part, to the coronavirus.
Seavitt said new car sales were strong in January, when he sold more than he did in the same period a year ago. But his February sales were flat and March has started out slowly.
“I hate blaming everything on the virus,” Seavitt said. “I think the stock market plunge rocked a lot of people and the virus might have also caused hesitancy. I think people are avoiding certain places.”
To take precautions, Seavitt has hand sanitizer in all the restrooms at his store and has Lysol wipes for his staff to clean their monitors and keyboards with daily.
The slowed production in China has not impeded Village Ford’s parts flow for repairs, and he “doesn’t think it will, for a while anyway.”
Motor City Buick GMC boss John Pitre said he worries about a potential vehicle supply shortage this summer.
“We might see some vehicle interruption, just like with the (General Motors) strike you didn’t feel it for 60 days later,” said Pitre, whose dealership is in Bakersfield, California. “We might … see some vehicle interruptions or parts shortages later in the summer. Some of our Buick models are made in China and Korea.”
GM builds the Buick Enclave in South Korea and the Buick Envision in China.
Production is only one piece of the puzzle, however.
David Closs, a supply chain management professor emeritus at the Broad School of Business at Michigan State University, said the issue at the moment is less about manufacturing disruption than transportation problems.
After talking with industry leaders, he said there’s a strong indication that “things are starting to move now, improving.” Factories are starting to re-open but now the auto companies must navigate transportation “bottlenecks.”
“The ships are not positioned,” Closs said. “They’ve been moved around and, because of the lack of loads in recent weeks they’ve been held up. It’ll take time to fix that. Ships are starting to leave Asia with products but it still means four to six weeks before things start stabilizing.”
Another issue of concern, he said, is the impact on workers who move containers from ports to rail yards or other facilities. They tend to be private contractors who shuttle materials short distances on their privately owned trucks, and the profit margins are so thin that weeks of unemployment may mean loss of vehicle ownership, Closs said.
“Some of these guys, when business got cut, they went out of business. They operate day to day. You shut them down for two or three weeks, and they can’t make payments on their trucks,” he said. “The margins are very tight for these guys on the coasts, at the ports.”
Finally, port schedules tend to be tight all the time because capacity requirements have been constrained, Closs said. So now the industry is trying to shoehorn additional deliveries. “That’ll make everything worse.”