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Manufacturers are being hit hard by supply chain disruptions, forced closures and demand shocks as lockdowns intensify amid the Covid-19 pandemic, causing global output to plunge in the automotive, textiles and electronics sectors.

Global production is expected to drop by 13.1% in the automotive industry in H1 2020, 8.4% in textiles, and electronics will see a decrease of 7.4%, as compared with Q4 2019, reveals new data by law firm Baker McKenzie and research firm Oxford Economics.

The shutdown of key manufacturing hubs across the globe, alongside travel restrictions imposed by countries making it difficult to get goods to their destination, are driving this decline in output.

As figure 1 shows, the automotive industry has been hit most dramatically in H1 2020, followed by textiles, electronics, and the aerospace industry, with all four sectors forecast to be in decline for the rest of the year.

While the output of the car industry has been hardest hit out of the sectors highlighted, it will also be the quickest to rebound, with a 4% forecast growth in H1 2021. Electronics will be the slowest to bounce back, with output projected to grow by just 0.2% in H1 2021.

Figure 1: % change in global output growth by sector by half-year extrapolated from Q4 2019

The motor industry has particularly lengthy cross-border supply chains that are complex in nature, which has made it difficult for automotive companies to build and ship components.

Before the pandemic, supply chain risk management principles often only applied to top-tier suppliers, leaving upstream suppliers vulnerable to shocks. However, lower-tier suppliers are critically important to supply chains, and disruptions at these levels can quickly cause problems throughout the chain, says the report.

Pamela Cain, director at Marchant Cain, an automotive component supplier based in Coventry, tells GTR about the difficulties automotive suppliers are facing.

“It is important to highlight that many automotive supplier companies have contracts to fulfill and whilst they might have reduced staff working, they do, nevertheless, have to work to avoid breach of contract clauses being enforced. Not many companies could foresee that they would need to insure against Covid-19 specifically within the force majeure clause and consequently their insurers will not cover them. Even if the original equipment manufacturers  are saying they are not working or don’t want the parts, we still have to produce them for when they get back to work so that we have fulfilled our contracts and they have components to work with immediately on return,” she says.

As demand for cars and car parts plunges, automotive companies including BMW, Tesla and Ford have turned to making personal protective equipment (PPE) and ventilators to help ease the pressure of the pandemic on health services. However, Cain adds: “I’m not sure how successful they have been in actually protecting staff. We are in the process of designing and manufacturing a face mask to FFP2, and eventually to FFP3 standard for NHS staff. Currently in prototype, it takes a lot of work to get it tested and accredited to the right standard, but we are almost there.”

 

Bouncing back

The JP Morgan Purchasing Managers’ Index (PMI), a number which indicates the overall health of the global economy compiled by IHS Markit every month, fell by a record 6.7 points in March, building on a prior record decrease of 6.1 points in February, when it dropped from 46.1 to 39.4 – its lowest since the peak of the global financial crisis in February 2009.

Global manufacturing output declined sharply as “slumping demand, personnel shortages, supply constraints and forced closures of non-essential businesses all limited production capacity” says IHS Markit. However, for manufacturing, the decline in March was less severe than in February, as China eased off its lockdown and its manufacturing industry showed signs of recovery, with slower rates of decline recorded in automotive, chemicals, metals and mining, and machinery equipment, compared to the month before.

The report by Baker McKenzie and Oxford Economics adds that the key factor governing how quickly manufacturing sectors recover will be firms’ ability to “re-mobilise complex multi-country supply chains, which in turn depends on their supply chain mapping and risk management”.

Global manufacturing value-added output, a measure of the value of all goods and services produced, will bounce back in 2021 from negative figures projected this year, with China expected to reach 7.7% value-add, while the US may see up to 6.1% and the Eurozone could reach 5.2% (see figure 2).

Figure 2: Global manufacturing value-added output across regions 

 

Digitalisation

Supply chain digitalisation is one way that companies can begin to build resilience against supply chain disruptions. “Big data analytics can assist firms in streamlining their supplier selection process, cloud-computing is increasingly being used to facilitate and manage supplier relationships, and logistics and shipping processes can be greatly enhanced through automation and the internet of things,” the report says.

As well as digitalising physical trade through big data and automation, the digitisation of trade documents like bills of lading could also offer traders relief and resilience.

As courier services carrying important shipping documents grind to a halt, electronic bills of lading (eBL) are being executed by fintech platforms, alongside the digital exchange and management of trade-related documents.

Bolero International’s Galileo platform uses application programming interfaces (APIs) to connect banks and other third-party systems, with users able to create, edit and manage electronic guarantees, as well as open account transactions and eBLs. Bolero’s head of sales Jacco De Jong tells GTR that one carrier using its services has increased its use of eBLs four-fold because of the pandemic.

Elsewhere, essDocs’ CargoDocs platform digitises documents including bills of lading, warehouse warrants and certificates of origin, and Wave’s service allows for the digital exchange of all shipping and trade-related documents through a secure decentralised network.