Fears that the COVID-19 outbreak will disrupt supply chains and hamper U.S. automotive and parts production have been circulating for months. Automakers and suppliers have “war roomed” strategies to mitigate the risks in supply chains. These responses have been well-honed after years of disruptions, including the 2008 financial crisis and the 2011 earthquake and tsunami in Japan.
Yet, as the virus spreads, the fear of a supply crisis is joined not only by a demand crisis but also by a public health crisis.
Doing the right thing for public health right now will, in the longer term, be the right thing for businesses, the automotive industry and the economy. Public health officials tell us we must “flatten the curve” of infection and act aggressively to slow the spread of COVID-19.
The bold actions by automakers taken last week – to allow all salaried workers who can work from home to do so – are just the beginning of what is needed.
Ceasing production operations across the auto industry will be necessary to keep employees out of health peril. Volkswagen’s plant in Chattanooga, Tenn., for example, announced plans to idle production starting Monday, March 16. While most automakers and suppliers are allowing salaried personnel to work remotely, the hourly workforce does not have this luxury; every day, thousands of workers must show up at auto assembly, parts and components manufacturers to build highly complex products. They work in close proximity, and they all touch the product multiple times as it travels down production lines. A virus as contagious as the one that causes COVID-19 will spread like wildfire in this atmosphere. Consequently, auto and parts production will have to stop for a few weeks to give the U.S. health care system precious time to deal with the influx of COVID-19 patients.
Every week the industry is idle is costly. The Center for Automotive Research (CAR) estimates that just a one-week shutdown would result in an estimated annual loss of 94,400 total U.S. jobs, $7.3 billion in overall earnings and $2 billion in lower government tax receipts from personal income taxes, contributions for social insurance programs and current transfer payments. If the industry is down for six weeks, CAR estimates that the impact would be more than 566,600 jobs, $43.7 billion in overall earnings and nearly $12 billion in government revenues.
This economic pain would hit the top automotive states — with almost a third of the impact concentrated in just four states: Indiana, Michigan, Ohio and Texas. The deep supply chains and relatively higher wages mean the employment multiplier impacts will be more significant as well.
The auto industry is stronger than a decade ago, but parts of it remain vulnerable. While automakers and suppliers that weathered the 2008-2009 recession are more financially resilient now than they were back then, the supply chain depends on small businesses that an extended shutdown could wipe out entirely. Roughly 75 percent of automotive supplier establishments employ fewer than 100 workers, and these firms – like all small businesses in the United States – are going to need help with liquidity to stay afloat.
Even once the immediate medical crisis has passed, aggregate demand will suffer across the whole economy. Autos are unique, though, since buying a new vehicle is one of the most significant purchases any household will make. In other words, it’s highly discretionary. For automotive demand to rebound on the other side of this crisis, the United States needs to support businesses with low-interest loans and grants, tax payment delays and expanded safety-net programs for workers through the crisis, to maintain a base level of demand in the economy.
Now is not the time to knee-cap the eventual recovery. The auto industry is one of the most globally integrated industries in the world — moving raw materials and intermediate goods to build highly complex assemblies from locally- and globally-sourced raw materials, parts and components. As such, the auto industry has been especially impacted by the ratcheting-up of tariffs with our global trading partners.
As we stand on the precipice of an economic crisis, temporarily lifting tariffs and delaying the Trump administration’s planned June 1 in-force date of the United States-Mexico-Canada Agreement will provide the breathing room needed to get the automotive industry back on its feet once the COVID-19 pandemic has receded.
We need to support investment in critical R&D and advanced technologies through the recovery. Automakers and suppliers are in a fierce battle to win the future of electrification and automated vehicles; firms are making big bets on future technologies and trying to maintain the U.S. technological leadership in this industry. All of those research, development and engineering investments are at risk as stock prices tumble and companies switch over to survival mode.
Governments need to enact policies that will support continued R&D investments through the downturn: Low-interest loans, refundable tax credits, accelerated depreciation on machinery and equipment that will modernize production.
We also need to re-enlist the “arsenal of democracy.” The auto industry answered the call in World War II to convert manufacturing to support the war effort, and it must once again answer the call to support the war on this global pandemic. Manufacturers should think about ways they can partner to produce the things the medical community needs desperately right now — masks, personal protective equipment, sanitizing agents.
The industry also needs to think about how to prepare if this virus, or another global pandemic, comes around again, so that it can modify policies and benefits to weather the storms ahead.
COVID-19 will not be the last catastrophic event to hit the auto industry, and we need a public-private partnership to be ready for each subsequent challenge.
In the face of the COVID-19 pandemic, the auto industry needs to come together as never before to do the right thing for the long-term sustainability of the United States. By doing the right thing for public health, the auto industry will do the right thing for the economy — and the industry, as well.
Carla Bailo is president and CEO of the Center for Automotive Research (CAR), an independent nonprofit research organization focusing on North America’s auto industry and based in Ann Arbor, Mich. She previously was vice president of mobility research at Ohio State University and held executive positions with Nissan North America and General Motors.
Kristin Dziczek is CAR’s vice president of industry, labor and economics. She has nearly 30 years of experience as an automotive researcher and analyst.