The COVID-19 pandemic is raising new cost issues for auto suppliers as they consider ways to restore production of critical lower-tier components, and to rebuild falling buffer stocks of imported parts.
One looming question: Who will foot the bill for any added expense to keep virus-challenged supply chains humming?
While North American suppliers typically keep at least two months' inventory of parts sourced from Asia on hand, suppliers could be nearing the end of that buffer, according to an analysis by the Center for Automotive Research in Ann Arbor, Mich.
But since no one can foretell how long the pandemic will last, or how much worse it might get, there is little supply chains can do to move production to offset the inventory challenge, said Brian Collie, global head of auto and mobility at Boston Consulting Group.
"Given there is not a lot of secondary tooling or capacity, they are pretty exposed if it hits one of their suppliers or one of their production facilities," Collie said of individual parts companies. "Shipping tooling and moving capacity is a very expensive thing to do."
But Sheldon Klein, attorney at the suburban Detroit law firm Butzel Long, told Automotive News that his supplier clients are indeed considering resorting to relocating tools and airfreighting critical components. Contract cancellations, related breach of contract claims and force majeure considerations are emerging as new concerns around the industry.
"When China says, 'Go ahead, start manufacturing again and start shipping,' it's going to take time to refill the supply chain and rebuild inventories. It's not as if the day after China resumes operations, all the problems are going to be solved," Klein said.
But he warned that that rush to catch up on lost production and rebuild inventory buffers will result in large expenses, and probably some disagreement over who will pay for it.
"At that point you get into things like airfreight and other extraordinary expenses necessary to keep production going. And frankly, I think there's a very good likelihood that there will be litigation arising out of those questions. It's going to be non-trivial sums of money," he added.
