Component supply disruption leads to production halt - how important is component backup?!

The term globalization is frequently mentioned in many articles about automobiles. In our impression, globalization is the synchronous introduction of the latest foreign models and technologies into the domestic market, so that consumers can enjoy new products from overseas as soon as possible. However, in this epidemic, we have also seen the other side of globalization. In addition to imported cases appearing in various parts of the world, automobile companies have also suspended production due to the epidemic.

Many internationally renowned auto parts brands invest in factories in China to produce parts for them, but some companies are in a state of shutdown due to the epidemic; companies that have resumed production are still finding it difficult to meet expectations in terms of production capacity. As the non-normalized time gradually lengthens, the shortage of parts supply will gradually affect car companies that have factories overseas. For example, Hyundai's Ulsan plant in South Korea, Kia Motors' plant, and the Renault Samsung plant, a joint venture brand, have all suspended production; the same is true for Nissan's Kyushu plant; as far away as Europe, Fiat Chrysler Automobiles has also stated that its parts inventory is running low due to Chinese parts factories.

Seeking the greatest profit is the core of a market economy, although "greatest" is only a relatively dominant choice among multiple options. The automotive industry is no exception. Automakers can compress operating costs through cooperation with parts suppliers and through large-scale purchases. Parts suppliers also naturally measure and judge the advantages and strengths of different regions around the world, and then choose to invest in building factories to reduce production costs and expand local markets.

In addition, the Chinese auto market is currently the world's largest auto market, including the upstream and downstream market share of new cars, parts, spare parts, etc. Car companies are willing to put production resources into the Chinese market, which has a positive impact on reducing transportation costs, reducing labor costs, and shortening the time for parts allocation. It is because of these factors that more parts companies choose to invest in domestic production.

Data from the Japan External Trade Organization shows that Japanese car companies use more than 30% of parts produced in China, and the value of auto parts imported from China in 2019 was approximately US$3 billion. Turning to European and American car companies, their dependence on Chinese parts has also risen to approximately 20%. The supply pressure of Chinese parts is no longer simply limited to the supply shortage of first-tier suppliers. Because some products need to undergo secondary or multiple subcontracted production, the shortage pressure has gradually begun to involve the entire supply network.

More than a thousand parts are assembled to produce a car, and the number of suppliers is in the hundreds or thousands. How to efficiently manage suppliers is one of the problems for automobile production companies. After the success and promotion of the "just-in-time" production model, many car companies have begun to improve their production management methods and gradually reduce the inventory of parts during production management. This production method is naturally a highly efficient production method when market demand is strong; one of the key points of the "just-in-time" method is to ensure that the required parts are free of defects. Therefore, after manufacturers choose a good supplier, they basically do not change or even conduct in-depth cooperation, and their dependence on them gradually increases.

Car companies have different classifications of parts suppliers. Some classify suppliers into A\B\C\D levels based on performance; others classify suppliers into important suppliers and general suppliers based on the importance of parts characteristics. There are also suppliers divided into monopoly, relative monopoly, relative competition, and fully competitive suppliers based on parts resource conditions.

The increased dependence on suppliers is the key to this supply disruption crisis. Not only should vehicle companies avoid similar situations, but parts companies also need to avoid them. As early as more than ten years ago, Japanese parts supply companies adopted a decentralized strategy focusing on China and targeting Southeast Asia, purchasing from countries with lower costs in the Southeast Asian region.

Denso Corporation of Japan has built an emergency system for the production and supply of core parts in remote areas in response to non-normal situations caused by natural disasters. During this epidemic, its management stated that the parts production status has not yet reached the critical stage where the supply chain will soon be broken, which is the value of preparedness.