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A Bumpy Re-Start for the North American Automotive Industry

June 30, 2020

The North American automotive industry ground to a halt in March 2020 as the spread of COVID-19 forced a complete shutdown of all OEM plants, leading the supply chain to follow suit.  This shutdown was originally planned to last a few weeks, but as the virus continued its spread it became clear that a longer shutdown was necessary to protect the safety of the workers and to maintain compliance with government mandates. Ultimately this led to Tesla restarting production on May 11, and the big 3 automakers following suit on May 18.

The industry employs 1.7 million people in the U.S. alone, and requires a well-oiled supply chain from raw materials to dealerships to function with any level of efficiency.  One of the major challenges in the current environment is the geographic spread of the supply chain combined with the various local, state, and federal mandates and restrictions in place for businesses.  An OEM that is ready to restart is reliant on its entire supply chain to be ready as well, and that has proven to be anything but a guaranty.

In particular, the rules and requirements in Mexico have caused large disruptions, as the government has put health and safety benchmarks in place that have been difficult to achieve.  This has caused disruptions and delays throughout the supply chain, as many vehicles produced in both Mexico and the U.S. have a substantial amount of Mexican-sourced parts.  For example, Mercedes-Benz had to shut down their Alabama plant for a second time due to parts shortages from Mexico.

Another significant challenge is implementing the appropriate protocols to help maintain worker health.  The OEMs have implemented a number of measures, including daily temperature checks, social distancing, and plastic barriers between workers.  Even with these changes, workers in multiple plants have tested positive, leading to further shutdowns for equipment cleaning and further testing.

Breakouts have also occurred at supplier factories, leading OEMs to stop receipt of those parts until the situation was under control.  The impact of all of this has been a halting and uneven restart for the industry.

As these kinks are worked out, OEMs are also pushing to add additional shifts to ramp up production to meet consumer demand.  These decisions are being made on a plant-by-plant basis, as some vehicle models have shown to be more resilient to economic downturns than others.  OEMs, overall, are reporting strong dealer demand, as the prolonged shutdown has depleted dealer inventories.

The industry is expecting prolonged impacts on overall sales throughout 2020, which provides additional time to catch up on production and increase supply chain efficiencies to pre-COVID levels. Additionally, many of the OEMs are using their traditional summer breaks to catch up on production lost during the shutdown.

The automotive industry is well on its way to being back on its feet.  The restart has been anything but smooth, but that doesn’t come as a surprise given the complexity of the supply chain and the continued complications of COVID-19.  The long-term industry impacts are not yet known, but production volumes are now increasing daily, and manufacturers are working hard to bring the industry into this new normal.

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