Shanghai's auto industry resumes work, auto market decline is expected to narrow, supply chain resilience needs to be strengthened

For automobile companies, after experiencing one black swan event after another, they now feel more strongly the importance of supply chain resilience.

On April 22, the China Passenger Car Association stated that according to research and estimates, the narrow passenger car retail market in April was around 1.1 million vehicles, a year-on-year decrease of 31.9%.

However, with the resumption of work and production in Shanghai's automobile industry, the automobile industry is expected to gradually recover. Specifically, the average daily sales of major manufacturers in the first and second weeks fell by 32% and 39% year-on-year respectively. The auto market was affected by production stagnation and terminal store closures, and the decline was large. It is expected that the market decline will narrow to about 35% in the third week and further narrow to about 26% in the fourth week.

At present, the state and government departments in charge have successively introduced a series of measures to ensure logistics and transportation and stabilize growth. Some epidemic-affected areas have also adjusted control measures according to local conditions.

"FAW has generally resumed work and is ramping up production. SAIC has also gradually carried out resumption of work tests, and parts companies have also begun to gradually resume work and production, but the speed will not be fast. There is still uncertainty about the full release of supply chain capacity, and the task of ensuring the integrity and effective protection of the supply chain is still very arduous. In addition, due to the increase in manufacturing costs and logistics costs, the profitability of the automobile industry will be further reduced." Chen Shihua, deputy secretary-general of the China Association of Automobile Manufacturers, told the 21st Century Business Herald reporter.

The test is still going on. In fact, since the beginning of 2020, the automotive industry supply chain has faced unprecedented challenges, from the COVID-19 pandemic, chip shortages to geopolitical conflicts, the fragility of the automotive industry supply chain has been exposed. For automakers, after experiencing one black swan event after another, they now feel the importance of supply chain resilience even more.

Shanghai's auto industry resumes work and production

It has been more than a week since Shanghai launched the first “white list” of companies resuming work and production, and many OEMs and parts suppliers have resumed production.

On April 24, a reporter from 21st Century Business Herald learned that SAIC Volkswagen, a joint venture automaker under SAIC Motor, has recently resumed production, and its Anting Automobile Plant No. 3, MEB Plant, stamping plant, and engine plant have successively resumed operations.

Prior to this, on April 18, SAIC Motor launched a stress test for resumption of work and production. Its various production companies, including SAIC Passenger Vehicle, SAIC Volkswagen, and SAIC General Motors, were all making final preparations for resumption of work and production. The next day, the first car under the stress test of SAIC Passenger Vehicle rolled off the assembly line.

Also on April 19, Tesla's Shanghai Super Factory, which had been shut down for 23 days, resumed production. It is said that two days before that, more than 8,000 Tesla employees had returned to the factory one after another.

The resumption of work and production of OEMs is inseparable from parts suppliers.

In addition to the main engine factories, SAIC Motor's production companies that have resumed work also include upstream parts companies such as HUAYU Automotive. Yanfeng, a subsidiary of HUAYU Automotive, has more than a dozen factories in Shanghai, covering interior decoration, seats, electronics and other aspects. According to reporters, as early as mid-March, some factories began closed-loop production to "make every effort to ensure supply."

Song Gang, senior director of production and manufacturing at Tesla's Gigafactory, also said in an interview that many Tesla parts suppliers in Shanghai have also resumed work in sync with Tesla's resumption of work. From the "white list", we can see that the Shanghai branches of companies such as Joyson Electronics and CATL are among those that have resumed work and production.

However, it is not easy to resume work and production while carrying out epidemic prevention work. According to feedback from many companies, due to factors such as poor supply chain and insufficient staff, the current resumption of work and production has just begun, and the production capacity of each factory is temporarily difficult to quickly return to the previous level.

According to the plan, Tesla will gradually achieve capacity ramp-up and reach full production in a single shift. However, under normal circumstances, Tesla's Shanghai factory operates in two shifts, and even if a single shift is fully operational, the daily output is only about 1,000 vehicles. At this level, the annual output is 365,000 vehicles - obviously not up to the planned annual production capacity of 500,000 vehicles.

SAIC Passenger Vehicle is also facing a similar situation. The relevant person in charge of the Lingang base of SAIC Group said: "Starting from April 19, the factory will adopt a single-shift system. If the supply chain can remain stable, we hope to gradually climb back to the pre-epidemic shift system as soon as possible." It is reported that under the condition of smooth material supply, the factory is also operating at full capacity in two shifts.

The resumption of work and production in the context of the fight against the epidemic faces many unfavorable factors. On the one hand, it is difficult for all personnel to be in place, which will more or less affect the rhythm of production. On the other hand, the situation of the upstream supply chain is also restricting the ability to further produce.

At present, many Tesla parts suppliers in Shanghai have resumed work, but the supply of other suppliers in the Yangtze River Delta region needs further promotion. Information from Tesla shows that many suppliers in Jiangsu Province are still in a state of suspension, and transportation is difficult. At present, the Ministry of Industry and Information Technology, Jiangsu Province, and Suzhou City are actively coordinating the restoration of the supply chain.

70% of the suppliers of SAIC Volkswagen MEB plant are from Jiangsu and Zhejiang regions. The current logistics control measures in these regions are extremely strict, and cross-provincial transportation is extremely difficult. It is reported that SAIC Volkswagen is working with Anji Logistics, a subsidiary of the group, to develop a special transportation plan to integrate the centralized transportation of parts from multiple suppliers in a certain region to break through the transportation bottleneck.

The impact radiation area is very wide

Although most of Shanghai's vehicle manufacturers have resumed work, it is still difficult for the supply chain to recover synchronously. In addition, the business scope of supply chain companies located in Shanghai is not limited to Shanghai, and the pressure on the national automobile supply chain is still relatively high in the short term.

As the region with the most concentrated automobile industry in China, the impact on the automobile industry chain in the Yangtze River Delta has already produced a butterfly effect. He Xiaopeng, chairman of Xpeng Motors, Li Bin, chairman of NIO, and Richard Yu, CEO of Huawei's terminal business, have all expressed the impact that this epidemic will have on the national automobile industry.

Previously, several automakers whose production bases are not in Shanghai have been affected, including Weilai, Ideal, Great Wall Tank, Dongfeng Nissan, and GAC Honda. Recently, the epidemic in Harbin has affected the local engine manufacturer Dong'an Power, which may also affect the production of Changan, Ideal and other companies.

Since a car has tens of thousands of parts, the lack of one part will affect the whole car's production line. Due to the complexity and length of the automobile industry chain, the automobile industry chain has formed a relatively mature "main engine factory-tier1-tier2-tier3-tier4..." tree-like supply structure over the years.

Therefore, in an uncertain macro environment, OEMs need to manage downward and have a clearer understanding of the upstream and downstream.

"In the past, vehicle manufacturers only needed to understand the (first-tier) suppliers they directly faced, but now they need to manage the suppliers' suppliers and know the situation and information of tier 2 and tier 3, which was not necessary for OEMs to manage in the past." Zhang Junyi, global director partner of Oliver Wyman, told a reporter from 21st Century Business Herald on April 25.

In fact, under normal circumstances, most companies in the upstream and downstream of the industrial chain do not prepare too much inventory. For a long time, in order to reduce costs, the automotive industry has advocated Toyota's "Just in time" zero inventory management strategy, which arranges supply chains around the main manufacturers to reduce logistics costs. Companies do not need to have too much inventory and can quickly allocate nearby. This model has shown its drawbacks under the influence of the epidemic.

"Now, the supply chain must not only be Just in time, but also Just in case, in order to cope with problems such as supply chain disruptions and skyrocketing raw material prices. Therefore, if you have enough cash, you must stock up enough stocks," said Zhang Junyi.

However, he also pointed out that this is just the lesser of two options and is not the most efficient. Under normal circumstances, vehicle manufacturers or parts companies will not adopt this approach. However, in an uncertain environment, procurement, logistics, and finance must adopt a highly organized approach to connect the systems.