Why the corona virus can paralyze the auto industry

The Chinese Hubei province is infected by the corona virus. People stay at home, factories are closed. The focus is on many human tragedies and the fight against the virus. But the background is also about economic problems, because the outbreak of the disease hits the car industry at the wrong time. And emphatically shows us the limits of globalization.

Saab production in Trollh�tan
Saab production in Trollh�tan

From warehousing to direct delivery to the belts

In the 80s, car production was a national affair. Take Saab and the production of the 900, then the product was largely Swedish and other parts of it was European. The vertical range of manufacture in the plant was high, as was also the case with Volvo, Mercedes and BMW. The first vehicle with global suppliers in the Swedes' portfolio was only the 9000. Not because it was created in cooperation with Lancia and Fiat, but because components from Asia were used for the first time. The instrument unit and the control panel for the automatic climate control came from Japan. It wasn't cost reasons, as one might assume, that prompted a shopping tour in Japan. But because they were the best technical products.

In the 90s, GM cleaned up Trollhättan. Parts of the company were sold or outsourced, and the first components from GM's international pool moved into the cars. Surprisingly, at that point, a Saab still remained a very Swedish and at best European car. Former parts of the company continued to manufacture on the factory premises or in the immediate vicinity; the national suppliers remained on board. A 9-5, a 900 II and a 9-3 I were Swedish and made with a high proportion of regional components.

But one thing changed radically over the years. Warehousing in the factories, not only at Saab, was reduced more and more. Whereas in the 70s and 80s there were supplies for days and weeks, by the 90s at the latest there were only manual stocks for several hours. They also disappeared, storage could no longer be arranged because it tied up capital and resources. Sea or air freight containers or trucks now served as mobile storage facilities. The deliveries now came directly to the conveyor belts, were installed, and the finished product was usually already at the dealer's or customer's premises when the bills for components were paid.

A global network of suppliers

And something else caught my eye. Component manufacturing continued to move east. First to the former satellite states of the former Soviet Union, then ever further to Thailand, Vietnam, China. China became the world's workbench. Only with cheap, very simple products. Then becoming more and more complex and with a steadily increasing share in global production.

The first global product at Saab was the 9-3 II. The engines no longer came from Sweden, but from Germany or from a South American GM factory. Do we remember the Japanese air conditioning in the Saab 9000? The best solution on the market at the time. Technically demanding and expensive. History was repeated in the 9-3 II, but under a different sign. The air conditioning system was produced cheaply by a French supplier. A blend of components from various Asian countries. Unlike the previous years, it was not used because it was the best system. But because mass-produced goods that have been installed millions of times in the group. Saab was now fully integrated into the global network, but still maintained old relationships with small, Swedish suppliers.

Lightbar on the Saab 9-5 NG. A nice example of the complex internationalization of the automotive industry
Lightbar on the Saab 9-5 NG. A nice example of the complex internationalization of the automotive industry

That only changed at the very end. The 9-5 NG generation, like every other modern car, is an Asian story. The first Saab with a high proportion of China components, a child of its time. 9-5 NG drivers still feel the complexity of this shopping chain today. The Lightbar, a design highlight of the 9-5, with which Saab set a trend that continues to this day, is a complex hodgepodge of products from more than half a dozen Asian manufacturers. The reason why Nyköping has not yet been able to get a new edition off the ground.

The dependence of the industry on China

What was true in 2011 is now more than ever valid for an entire industry. Hubei Province is one of 11 Chinese provinces, a focus of the auto industry. French manufacturers have their factories there, international suppliers produce components and preliminary products for the global market. The plants also stand still in other regions. Volvo has production in its three Chinese factories set, There is also an impact on production beyond the Chinese borders. Hyundai has production in South Korea due to the lack of components set, also Renault. Kia has reduced its clock speed, Fiat-Chrysler is counting on that closure the first European factory in 2 to 4 weeks.

Companies are trying to build up stocks and establish alternative supply chains. The coronavirus crisis hits an industry at the wrong time because it is already struggling with many other problems. The nervousness is also high in Sweden, and it is above all the time factor that counts. The Association the Swedish automotive supplier asked its members about the effects of missing deliveries from China, the concerns are great.

Almost half of the interviewed The company claims that it would have to lay off employees if the crisis lasted longer. Trade unions and the industry organization FKG are calling for politicians to introduce short-time working in order to avoid redundancies. If the crisis resolves by the end of the month, the situation would normalize again quickly, according to FKG boss Fredrik Sidahl.

Principle of hope. What applies to Sweden can be transferred to the entire industry. Components and primary products from China are delivered and installed daily in every European plant. The dependency is great and shows the disadvantages of globalization. If the Hubei province as an automotive hotspot in the supply chain fails for months, the consequences will be enormous.

Lessons from the Corona Virus Crisis?

A current study by IHS on the effects Coronavirus on the auto industry estimates that 1.7 million fewer vehicles will be built, the factories in Hubei province will remain closed until mid-March. Crises like this will not remain unique. A strongly networked world will continue to promote the spread of diseases such as the corona virus. Will one learn lessons from it, the consequence of which would be the strengthening of regional structures?

That is hardly to be expected. Which is regrettable, because crises are warnings, but also opportunities. If you want to recognize them.

6 thoughts on "Why the corona virus can paralyze the auto industry"

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    Just in Time

    I never understood the manager's hype about storage costs. The price for saved storage and the one-time effective optimization of cash flow is high.

    During the changeover, the supplier's invoices and his liabilities were postponed for a few days. Since then, and for decades, these have been coming back every day ...

    So only the warehouse is saved. The optimized cash flow for traditional manufacturers in the 1980s or 1990s had its uniquely positive effect on any balance sheet and has long been lost.

    What has remained is the increased vulnerability of the system, increased costs for the and increased environmental pollution due to transport, because delivery by rail no longer makes sense.

    Once upon a time there were spare parts available immediately. But that requires storage. With the manufacturers and the dealers and workshops ...

    If the 9-5 NG hadn't been produced just in time, a light bar would probably not be a problem today. But other manufacturers were much worse and Saab far ahead. An earlier Audi A6, for example, had problems with the sockets on the front axle, which all went into production just in time, which is why the workshop put off every year (in fact, they had to be replaced so often) and pointed out delivery problems ...

    This article here today questions this and stimulates rethinking and reflection. It’s really great.

  • blank

    After all, a CO2 pause when China produces less. So seen, I join Aero 9 3, which is a positive aspect in this drama. Well written, the transition from SAAB to now.

  • blank

    ... fewer cars produced due to the pandemic. There is “worse” news.
    The globe can use the break.
    Still an interesting article.

  • blank

    Very interesting insights again

  • blank

    Sure, globalization. As long as you get somebody in production somewhere who works for even less, it will work. You will hardly draw any conclusions from the questionable consequences (see article); greed for even more profit rules.

  • blank

    Time to Find New Subcontractors Outsider

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