Things were looking good for the global automotive sector entering 2020. Annual vehicle demand in the United States—Canada’s main export destination—was just shy of the recent cyclical peak and stabilizing around a healthy plateau. The productive capacity of original equipment manufacturers (OEM) with operations in North America had also been gearing up, fuelled by significant investments within a highly competitive technology race to satisfy the significant wave of vehicle replacement needs. How has COVID-19 changed things?
Deep and sophisticated supply chains are a hallmark of auto sector efficiency, but instantly became the sector’s Achilles heel when the COVID-19 outbreak hit. The automotive sector is now considered to be among the most vulnerable to the impacts of the global pandemic. According to S&P Global Ratings, the automotive sector exhibits the highest rating downgrade pressure. In Canada, the auto sector has one of the highest rates of reliance on imports of intermediate goods among all sectors. Normally, vehicle suppliers keep at least two months of parts inventory sourced from Asia and it usually takes between 30 to 60 days to receive new shipments from China to North America. This means supply chain disruptions in Asia can have significant business implications.
As the virus epicentre rotated—first from China to Europe and then to the U.S.—national lockdowns and stay-at-home orders temporarily shuttered factories and largely kept vehicle buyers away from dealership showrooms. China’s 80% drop in vehicle sales rocked the world. And prior to implementing their own temporary shutdowns, globalized OEMs and myriad suppliers faced the daunting prospect of China-sourced parts shortages...
This was excerpted from a 21 May 2020 article written by Peter G. Hall, Vice-President and Chief Economist, Export Development Canada.