Covid-19 a wake-up call for local automotive players

Posted on 26 March 2020

Source: The Edge

ONE lesson to be learnt from the Covid-19 outbreak is that the reliance of manufacturers on China — the world’s factory — has been costly, as the country imposed lockdowns that disrupted global supply chains.

Malaysia’s automotive firms, especially those that import parts and components from the country, are not immune to the risks of potential delays in production.

Malaysia Automotive, Robotics and IoT Institute (MARii) CEO Datuk Madani Sahari says the Covid-19 outbreak in Wuhan should serve as a wake-up call for local automotive players to not be overdependent on a single supplier from a single country.

“Wuhan is an industrial zone; many OEMs [original equipment manufacturers] and vendors are there. But my view is that, in any case, single sourcing from a single country is never a good strategy,” he tells The Edge.

MARii — an agency under the Ministry of International Trade and Industry (Miti) — is the coordination centre and think tank for the country’s automotive industry.

Madani says MARii is currently making a list of OEMs that have been affected by the outbreak and identifying the parts and components that can be produced by other vendors.

“OEMs that reside in China, as well as those based in other countries but getting their components from China, are equally affected. We will try to match their components against the capabilities of other vendors to produce similar components,” he says, adding that one of the alternatives is Japan.

Madani says when carmakers transfer their part and component sourcing channels from one country to another, they do not have to start from scratch. “What is expensive is the design of the tooling. But since this is a transfer, we can do copy tooling, which means that the design has already been done and, based on that design, we can fabricate the tooling for our new vendors.”


Do it now or later?

Nevertheless, Madani concedes that the short-term solution is to stick with the existing suppliers.

“You cannot expect automotive companies or OEMs to change their suppliers within the next three months. If you require a new set of machines, you would probably need nine to 12 months for any new parts to be reproduced by another supplier. By then, the Covid-19 outbreak may have already resolved itself,” he says.

Federation of Malaysian Manufacturers (FMM) president Tan Sri Soh Thian Lai believes local manufacturers, including automotive players, should start looking for alternative sources in South Korea, Japan, Taiwan, Asean or even Europe.

“If China is able to contain the outbreak within the next two months, I think the supply chain situation will improve. But if this prolongs until June, it will be worrying,” he tells The Edge.

FMM is the largest private-sector economic organisation in the country, representing over 3,000 manufacturing and industrial service companies of various sizes.

Soh stresses that local manufacturers must have precautionary plans in order to survive.

Although the cost is likely to be higher outside China, it is still a better option than a total production halt, which essentially means zero cash flow.

“Now, the critical things are working capital and cash flow. It’s all about survival. You need to have cash flow to survive. Once you stop production, you would have a problem paying fixed expenses such as electricity and salaries. Profitability is no longer a priority. You must at least survive,” says Soh. “Once the virus issue is resolved, demand will pick up strongly. Don’t just look at profitability now. You must look at the long term. This is my advice to all members.”


Bermaz and NHF: Only small parts from China

Bermaz Auto Bhd CEO Datuk Francis Lee Kok Chuan remains optimistic despite the global supply chain disruption. “Our main parts do not come from China, they come from Japan. Generally, automotive companies in Malaysia have high levels of inventory, so this could be a good time for us to clear some stock. Other than that, it should be business as usual.”

Lee reiterates that he does not see any significant impact on Bermaz — the sole distributor of Mazda vehicles in Malaysia — in the next three to four months. “Some of our small auto parts, such as nuts and bolts, do come from China but they are not the big material parts. We have quite a lot of spares of these small auto parts, so I think we are probably the least affected.”

However, Lee acknowledges that if the Covid-19 crisis gets worse, everyone in the world will be affected. “I think the impact will be greater than the trade war. Simply put, if there are no parts, there is no car. If there is no assembly, there are no sales. The trade war is just a matter of pricing. If you are willing to pay, you will get your stock.”

New Hoong Fatt Holdings Bhd (NHF) managing director Chin Jit Sin says although some of its parts originate from China, the company has not been impacted by the Covid-19 outbreak so far.

“We make a lot of things ourselves. We source smaller parts from China; that is not a big problem. As for our raw materials, which are mainly steel products, the shipments are okay,” he says. “Less than 50% of our steel portion comes from China. Steel operates in a hot environment, I do not think any virus can [survive] there. Steel production cannot stop because it uses furnaces. The way I see it, this is a bigger problem for carmakers than for us. There is no disruption for us, just a slight delay.”

Klang-based NHF is mainly involved in the manufacture of metal and plastic automotive body parts for the replacement market.

Chin concedes, however, that the longer-term concern is the impact of Covid-19 on the global economy. “We have customers all over Southeast Asia, including Indonesia and Thailand. The virus may slow down global economic activity and that is not good for anyone in the long run.”


Special green lane?

Although the hands of local automotive companies appear to be tied, MARii’s Madani says the least they should do is to monitor the crisis and their inventory levels on a daily basis.

For instance, says Madani, most of Proton’s parts are sourced from Hangzhou while some of Perodua’s components come from China. Even though these are just a few small components, their production will be disrupted if the inventory is depleted.

“They are getting these parts and components delivered by air. They still have another few weeks to sort it out. They need to make sure the flights are in and customs can get it cleared. It’s really a day-to-day management thing,” he says.

Madani adds that although China has started to gradually open up its borders, there is still a long wait for customs clearance and delivery of goods. Hence, the problem facing Proton, and even Perodua, is the delivery of parts and components.

In fact, local automotive companies could request “green lane” status for such deliveries from China, Thailand or other countries, he adds.

“Special clearance, quick clearance, documentation review in advance, all these things would make the whole process much faster,” says Madani. 

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