The supply chain starts to fail, part two

I have spoken to so many bozos (mostly on the left, but a not insignificant number of MAGA people too) who think the economy works like a giant light switch. We can just sit here in the dark and hide from pneumonia for months and months and months, then the president will flip the switch and the economy will start back up again like nothing ever happened. Economics does not work that way.

Something like that may have happened if these shutdowns lasted for two weeks (a period of time most businesses have cash on hand to manage). But we are long, long past that now, and things are starting to break in ever more permanent ways.

Regardless of what does or does not happen in the financial markets during a new period of spectacular interventions from the Federal Reserve, the foundations of the “real” economy are currently getting rocked to their core.

The auto manufacturers are some of the largest employers in this country. Right now, they have idled plants and furloughed workers indefinitely. They can’t go back to manufacturing, whenever it is that they are allowed to do that, without (1) demand for their products, which is difficult to conceive of when we are at Depression-era unemployment, and (2) a large network of companies that supply their parts surviving this episode.

What’s happening with the auto manufacturers’ supply chain is happening to support systems across the country (usually unseen by ordinary Americans). Even food production companies are warning that they are losing their grip on being able to supply grocers.

From Reuters:

“I had the audacity or stupidity to say in January ‘I can’t imagine what could happen this year that could slow us down,’” said Clay, president and third-generation owner of Grand Rapids, Michigan-based Pridgeon & Clay, which supplies stamped steel and stainless steel parts to automakers and which has annual revenue of close to $350 million.

But now, with much of the United States at a standstill due to the coronavirus outbreak, one of the company’s two U.S. plants is idled and the other has a skeleton staff producing parts for commercial trucks. Pridgeon & Clay is juggling pressure from lenders, automakers and its own suppliers, gambling that automakers can restart North American production by mid-May before the auto parts maker’s money begins to run out.

“If we weren’t working on special deals with our suppliers, with our customers and with our banks, then the music would stop for us some time in mid-May, as it will for virtually everybody,” Clay said.

Suppliers and restructuring experts say major automakers are still paying bills, and suppliers received checks recently for goods shipped in February and March before factories shut down.

The real crunch for suppliers will come by mid-May. That is when the cash backlog runs out unless automakers are able to restart assembly lines, industry executives and consultants said.

Fiat Chrysler Automobiles NV (FCA) (FCHA.MI) (FCAU.N) and Honda Motor Co Ltd (7267.T) said this week they aim to gradually restart production in early May. General Motors Co (GM.N) and Ford Motor Co (F.N) have not set reopening dates. Some Asian and European automakers are aiming to restart U.S. production later this month.

“If the auto industry starts back up in early May, most suppliers should be able to turn the lights back on,” said Steve Wybo, a senior managing director at consultant Conway MacKenzie. “But the longer the shutdown lasts, the harder it will be for them to get the lights on.”

Many larger auto suppliers were in better shape financially when the coronavirus shutdowns came than they were when the 2008-2009 financial crisis hit.

But Laurie Harbour, CEO of Harbour Results Inc, a manufacturing consulting firm that works with suppliers, said she is concerned about smaller companies farther down the supply chain.

“If you weren’t strong going into 2020, your challenges are going to be significant for the balance of the year to get yourself back up to speed.”

Suppliers like Bob Roth are counting on a return to work by May.

In March, Roth and his staff at RoMan Manufacturing took swift action as the COVID-19 crisis intensified. The Wyoming, Michigan, maker of transformers for automotive and other industries is classed as an essential business, so it remains busy as demand for robots that use their transformers remains high.

But staying open has come at a cost. Roth, co-owner and CEO of RoMan, had to raise pay for many of his 150 workers by $7 an hour to compete against enhanced unemployment benefits included in the recently passed federal relief package.

He is also providing health insurance to workers staying at home to take care of their children or cope with other health issues.

One of Roth’s critical suppliers in Pennsylvania is under lockdown due to the COVID-19 pandemic. Roth has just four to six weeks’ supply of that product and his team has figured out a way to make it in-house. But the part would cost $50 versus the $10 he pays his supplier – money he cannot recoup from customers.

“We’re willing to take the margin hit now to keep the business moving forward,” Roth said. “But at some point in time, we won’t be able to support higher wages or healthcare benefits for people who aren’t working.”

The global auto supply chain is robust, but automakers can still rely on a single supplier for a key part. Automakers and big top-tier suppliers will need to use some of their cash to prop up small but critical suppliers, industry executives and consultants said.

Last week transmission maker Delphi Technologies Plc (DLPH.N) identified up to 40 suppliers now experiencing financial difficulties, CEO Rick Dauch said.

“In two cases we’ve gone in and given them some financial assistance, either by buying their raw materials for them or expediting payment to them so they can pay their bills,” Dauch said.

BorgWarner Inc (BWA.N) last week threatened to walk away from a $951 million deal to buy Delphi, after Delphi tapped its $500 million revolving credit facility to help weather the pandemic without its acquirer’s approval.

Scott Turpin, CEO of North America for Aisin Seiki Co Ltd (7259.T), the world’s largest transmission maker, said one of his main concerns is how well suppliers farther down the chain conserve cash.

“Unfortunately there will be some suppliers that cannot survive this,” Turpin said. “So we’ve all got to watch that very closely.”

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