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West Michigan manufacturers brace for disruptions from Chinese Coronavirus outbreak COURTESY PHOTO

West Michigan manufacturers brace for disruptions from Chinese Coronavirus outbreak

BY Sunday, February 09, 2020 05:45pm

A tooling engineer from Grand Rapids-based Tier-1 supplier ADAC Automotive was traveling in the Wuhan area of China when the Coronavirus public health crisis broke in late January. 

The employee, who was in the region to work on some of the company’s tooling, was quickly kicked out of his hotel room as businesses across the Hubei province shut down, although he was able to find other arrangements shortly thereafter.

“The best thing he did was get in touch with the U.S. Embassy and get on a list to get out of the country,” CEO Jim Teets told MiBiz.

On Feb. 3, the employee was notified he had a seat to fly on a chartered jet back to the United States, Teets said. But getting a seat on the flight was just the first part of the battle: He had to navigate various Chinese government roadblocks around Wuhan, with his passage guaranteed only by electronic documents he kept on his smartphone. 

The employee landed in California on Feb. 5 and currently is in quarantine at a U.S. Air Force base for a two-week period. 

Teets said ADAC executives also were scheduled to be about 140 miles west of Wuhan in early March to open a plant along with partners in the VAST Alliance, a global partnership with Milwaukee, Wis.-based Strattec and Germany-based Witte Automotive

“I don’t have confidence in March that it would be clean. We all said, ‘We don’t need to do this,’ so we just moved it to Germany,” Teets said. 

Teets also said his company got a call last week from General Motors looking for help on painting a part that would normally come out of China. 

“Luckily, it looks like we were able to work with them and a sub-supplier to find a solution,” Teets said. 

The experience has ADAC closely monitoring what effects the Coronavirus outbreak in China could have on their operations and downstream suppliers. 

“We don’t see a major disruption with us yet specifically for ADAC,” Teets said. “If this goes on another week or two, we’ll be fine. But if it goes beyond that, it could have a significant impact.”

In response to the public health crisis around the rapid spread of the virus, the Chinese government has required factory shutdowns across one-third of all provinces in the days after the Chinese New Year holiday period, which ended Feb. 8. Initially, the government planned a three-day extension of the holiday to help contain the spread of the virus, but that period has since been lengthened to an additional week in certain areas. 

The extended shutdown has many manufacturers examining their supply chains for any sort of exposure to the affected parts of the Chinese market in an attempt to stave off disruptions to production. 

Grand Haven-based Tier-1 automotive supplier GHSP Inc., a division of Grand Haven-based JSJ Corp. that has operations in China, did not have any executives affected by travel restrictions related to Coronavirus, said President and CEO Tom Rizzi, but the company has cancelled or postponed business travel in and out of China for the time being. 

“The prolonged shutdown due to the Coronavirus, and subsequent actions to contain its spread, pose a number of challenges to our global supply chains,” Rizzi told MiBiz in an email. 

That includes difficulty getting “adequate information from suppliers” about inventory, labor availability, work scheduling and component deliveries, as well as the status of suppliers further down the tiers, he said. 

“Quarantines and ‘stay at home’ orders have made it very difficult to ascertain, with certainty, the current status and potential countermeasures needed,” Rizzi said. “Additionally, there is a challenge in understanding which OEM plants will be impacted, and when, so we can plan our internal operations, as well as plan for diversion of scarce parts to the appropriate customer.” 

In the meantime, GHSP is working closely with OEM customers to look for alternative parts “on a limited basis.” 

“Given the validation processes required for our products, the potential for quick re-sourcing of parts is very small,” Rizzi said. 

Mike Wall, director of automotive analysis in Grand Rapids at IHS Markit, said the Coronavirus is another example of a disruptor that proves the need for automotive OEMs and suppliers to have strong visibility into all of their downstream supply chains. 

“Supply chains are being scrutinized to no end,” Wall told MiBiz

Wall said IHS Markit held a recent webinar on the Coronavirus that was “well attended,” and he’s getting a lot of questions from clients about the situation. He said the company is trying “to put an automotive context to it” and help clients better understand the recent events through a lens that makes sense for their companies. 

Given the timing around the traditional closure for the Chinese New Year celebrations, many manufacturers have already built in buffers to their supply chains, and for now likely have enough stock in transit to get them through. Even so, a shutdown lasting until Feb. 10 or Feb. 17 “is a big difference than if it goes into mid or late March,” he said. 

“Hopefully this is a more short-lived event, and it reinforces that you’ve got to have good visibility in your supply chain and options of how to respond and shift on the fly,” Wall said. 

SOME EXPOSURE

Analysts raised concern over the Coronavirus outbreak in recent quarterly earnings calls with public companies based in West Michigan.

That includes Zeeland-based Gentex Corp. (Nasdaq: GNTX), a supplier of automotive technology and auto-dimming mirrors. CEO Steve Downing said in a quarterly conference call on Jan. 31 that the Tier 1 automotive supplier has “probably a couple of weeks of exposure” if the shutdowns continue. 

Downing said in the call that the company had not yet experienced any shipment delays of its products into China, “but on the incoming supply side, you definitely see some things happening there.” 

“It’s not catastrophic like it was during the natural disasters from a few years ago, but more problems just getting components on time,” Downing said. “Given the complexity of our industry and the supply base, it’s something we always keep our eye on.” 

Wall at IHS Markit said he’s heard similar stories from other local suppliers, most of whom are still trying to fully understand the outbreak and its implications but have yet to see any specific effects here. 

The automotive supply chain in the affected regions of China produce a range of parts, including engines and transmissions, although most of those go to cars being produced for the Chinese market with minimal exposure in North America, Wall said. 

Where the situation gets murkier is around the various pieces and components produced in the region, which range from wiring harnesses and wiring systems to brake components and brake systems, as well as headlamp and taillamp parts. Some of those parts could be winding up on vehicles getting produced in North America, he said.  

BEYOND AUTO

The concerns also have spread beyond the automotive supply chain. Analysts questioned Benton Harbor-based Whirlpool Corp. (NYSE: WHR) CEO Marc Bitzer about whether the appliance maker was experiencing any direct effects from the factory closures in China.

“I would say at this point, the answer is no, we don’t expect a major impact,” Bitzer told analysts in a conference call on Jan. 28. “Our biggest concern is right now around our people but so far, it looks like all our 10,000 people are safe and healthy.”

Bitzer detailed three potential effects for the appliance industry that could come from the Coronavirus outbreak: a slowdown in sales in the Chinese market as people stay at home, a disruption in the availability of goods in the Asian and European market, and a supply chain disruption in North America for components sourced from China. 

“Throughout the last couple of years in most critical components, we went aggressively for dual sourcing,” Bitzer said in the call. “We’re single source only in very, very few components. We’re largely dual source, which gives you a little bit of a hedging.”

Elsewhere, executives at Kalamazoo-based Stryker Corp. (NYSE: SYK) said it was “too early to get into details” about what Coronavirus could mean on the company’s operations in China, where its exposure is limited.  

“Our exposure in emerging markets is low, and in China it’s even lower,” said Katherine Owen, vice president of strategy and investor relations at Stryker, during a call with analysts.

At Ada-based direct-selling giant Amway Corp., executives are “monitoring the coronavirus situation closely, and we are extremely grateful that (as of Thursday) there are no confirmed employee or Amway Business Owner cases of the virus,” the company said in a statement to MiBiz.

“Amway is taking precautions to prevent the spread of the coronavirus and to ensure that our employees and ABOs in China have our full support in responding to the situation,” the company said.

Amway China donated more than $1.4 million in product to the Red Cross and Charity Foundation of Wuhan, and all business travel to China is suspended until further notice. 

The company also received special dispensation from the Chinese government “to continue limited manufacturing operations in China because many Amway products, such as air purifiers, nutritional supplements and disinfecting household cleaners are in high demand.”

“The Amway family is keeping all Amway employees, ABOs and their families in China and all affected areas in our thoughts during this difficult time,” the company said.

Amway has 5,000 employees in China working at several locations throughout the country that include offices, manufacturing, distribution, warehousing, and research and development.

BRACING FOR MORE

Within the auto industry, the 11 Chinese provinces affected by the mandated delay in returning to work after the holiday are responsible for about two-thirds of all vehicle production in the country, according to an analysis from IHS Markit. The firm estimates first quarter production in China to fall by about 350,000 units if factories are idled through Feb. 10. 

“However, if the situation lingers into mid-March, and plants in adjacent provinces are idled, we could see some more substantial impact,” according to the report. If plants close for the majority of the month, it could result in more than 1.7 million units of lost production for the quarter, according to IHS Markit. 

Wall noted that most of the vehicle production in China serves that domestic market, and likens the current situation to the aftermath of the 2011 Japanese earthquakes. 

As well, Wall said one possible upside from the ongoing trade and tariff disruptions of the last year is that suppliers have already been investigating ways to shift their sourcing away from China. 

“Interestingly, if there’s been any sort of byproduct of the trade drama, it’s that we’ve seen companies looking at their supplier footprint in China,” Wall said. “That’s not to say they can (re-source production) on a dime, but those conversations have been going on. To the extent they’re moving through with those discussions, this may yield some opportunity.” 

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MiBiz Senior Writer Mark Sanchez contributed to this report. 

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EDITOR’S NOTE: This story has been updated from its original version. 

Read 9701 times Last modified on Monday, 10 February 2020 08:12
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