It has been talking a lot (specially on every social Network) about the COVID-19 impact on everyday life; but it’s interesting to me looking at the effects on the OEM and their organization.
For some decades, the automotive has been “merely” an assembly industry.
No generalist OEM produces, but is limited to designing and participating in the industrialization of the project; the final production phase of the car is reduced to the material supply to be assembled at the most propitious moment for the assembly itself.
ASSEMBLY AND GLOBALIZATION
Let’s start with a basic concept; the whole assembly industry is focused on the Just in Time policy and, where possible, it is implemented by the Just in Sequence.
- JIT is the put into practise the coordination of the actual need for materials on the production line, with their acquisition and availability in the segment of the production cycle, and when they are to be used.
- JIS is the evolution of JIT assuming that the material arrives finished for the production sequence.
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JIS
Without getting into technical details, you will realize that one of the first positive impacts is the elimination of warehouse stocks, or in any case of consistent buffers (charged to the customer) for the final assembling.
Another advantage is that OEMs are more responsive to demand because they can plan according to market demands and avoid keeping service area full of unsold cars (with the exception of a minimum amount necessary for the production of the plants).
These two aspects are directly proportional to the price of the final product; considering the final product (car / motorcycle / truck) as a constant, which means always with the same characteristics (model setting-up, engine, performance).
The other basic concept is the globalization meant on two fronts:
- IN – Procurement from the supplier that guarantees us the best quality / price ratio where by quality we do not mean only the quality of the goods but the whole service provided.
- OUT – The assembly done strategically in the most convenient place for the reference market.
After these assumptions, what has Covid-19 taught us?
Quite simply, we need to rethink a regional-based supply model.
Europe suffered from Covid-19 when China was inaccessible, losing sales opportunities, blocking entire automotive supply chains; sometimes even for ridiculous turnover.
The situation was reversed, then the same happened to the American countries and today, in September 2020, the situation is still subject to change every week.
Absolutely not being able to allow us to return to warehouses full of materials, the only solution is to create a regional-base activity.
In fact, if the European assembly lines had been supplied 100% with products from Europe, the effects of the Coronavirus would only have occurred with the regional lockdown.
With these premises, will Covid have an anti-globalization effect in the medium term for the automotive sector?
Probably yes!
In a scenario of possible new and sudden pandemics, losing weeks / months of production could mean embarrass OEMs that do not already have excellent turnovers, at least in Europe.
Could such a scenario lead to an involution or not?
Trying to think about it, it could be a great opportunity for supply companies that could make their production competitive again on the regional-based improvement.
For some realities, it may be necessary to have a regional-based production structure; but increasing sales costs or reducing profit margins.
Another solution, mentioned above and unimaginable for the moment, is the creation of mega buffers, to be paid by the supplier, in order to estimate a production block … but even in this second case, who will pay the costs?
Each asset has a cost, which will have consequences on the final price; the region-based production could respond not only to this aspect, which emerged from Covid-19, but also to any problem linked to the more and more short supply times.
Whatever you think, the impact on the automotive field, which now represents the 11/12% of GDP, will be much more significant than one might imagine.
The effects on the last stage, that is the sale in the car showroom, if the uncontrolled globalization is not stopped, could have disastrous results.
The lack of product, or the unscheduled excess, is highly deleterious for generalist brands.
These are my reflections on a topic that to most may seem technical and detached from the commercial activities of Dealers, but which if you reflect on for a moment is preparatory to the right availability of product / spare parts for the final customer.
What do you think about it?
Is it possible that a global company will see a decline in turnover of 40/60% in a quarter because some suppliers on the other side of the world are in isolation?
