As the world faces the threat of a near-global pandemic, the new coronavirus is also causing widespread disruption in the economy and the global supply chain of the automotive aftermarket, much of which remains to be seen.
The Automotive Aftermarket Suppliers Association (AASA) held an held an emergency one-hour webinar Wed., March 18, to discuss the impact of the coronavirus, SARS-CoV-2, which causes the disease known as COVID-19. The webinar included discussions and expert analysis from subject matter experts, including on legal issues for human resources and production contracts.
“When we emerge from this – and we will – our aftermarket fundamentals are strong. Our importance to consumers is vital,” said AASA President Kevin McCarthy.
“Developing a proactive supply response to the coronavirus is possible with access to the right data,” said Mark Segner, of Descartes Datamyne.
“We all get used to words like, ‘social distancing,’ ‘COVID-19,’ ‘quarantine,’ ‘lockdown,’ and ‘shelter in place,’” said Paul McCarthy, AASA president. “Though we are facing challenges, we think we should be hopeful. We are doing difficult things to aim for the best possible outcome in this pandemic as we fight this. And when we emerge from this – and we will – our aftermarket fundamentals are strong. Our importance to consumers is vital.”
As “shelter-in-place” orders begin, some of which are statewide, many schools and businesses are forced to close to increase social distancing and prevent spread of the disease, including “flattening the curve” so there is not a spike in sick people overwhelming hospitals’ capacity. Many businesses, including automotive repair shops and parts suppliers, are considered “essential,” though, and are exempt from the orders. These orders have generally also included (but are not limited to) businesses such as banks, grocery stores, pharmacies, restaurants (delivery or pickup,) hardware stores.
On Tuesday, McCarthy said, the association sent letters to governors of the United States as a reminder that vehicle repair needs to be included in any forthcoming orders as an essential business.
The coronavirus’ impact on manufacturing
Kevin Depew, deputy chief economist and eminence program leader at RSM, spoke about current market uncertainty. Parts of the economy, including in manufacturing, he said, were already in a slight recession this year, related to uncertainty about capital expenditures.
“But that was a very shallow, all things considered, recession, compared to what we’re looking at right now.”
The consumer’s strong spending habits had been the “backbone of supporting the garage economy,” he said.
What are considerations in looking for alternate suppliers?
“At this point, I believe it’s a foregone conclusion that the coronavirus continues to have a devastating effect on supply chains around the world,” said Mark Segner, vice president of global sales for Descartes Datamyne. “Companies are scrambling to minimize disruptions and hopefully mitigate the impact on their bottom line.”
Data shows that over the past year, overall import volume had fallen more than 19 percent compared to 2019, which was already “historically low, due to tariff trade disputes with China,” he said. For the same time frame, automotive parts imports were down about 14 percent, or $800 million.
The coronavirus’ impact began to be felt in February, with a 6-percent drop in overall import volume in one month, compared to Feb. 2019.
“We know the impact is already happening, and we know that it’s substantial,” Segner said. “The question that companies are facing is what to do about this disruption and how to mitigate their risks. The proactive approach prior to the COVID-19 outbreak would have been to invest in the resilience of their supply chains by establishing multiple suppliers and sourcing options.
“Many companies have already started to do that, based on the negative costs impact felt on their supply chains due to tariff increases over the last couple years. However, if you’re among the countless companies probably relying on Tier 1 suppliers, developing a resilient supply chain in response to the coronavirus –- or or any other supply chain disruption –- is still possible through access to actionable trade data.”
Segner said the first step in doing so is to research the global market and understand supply-and-demand risks. His data shows that in just the first 16 days of March, auto parts imports from China are down 54 percent, compared to the same time frame in 2019. An even greater impact may come from a decline in raw materials. Another large exporter for auto parts is South Korea, specifically for radial ball bearings and roller bearings. It relies on China for about 41 percent of its raw steel, and overall exports of Chinese steel fell 27 percent in January and February. China currently represents 30 percent of global manufacturing, he said.
In looking for a new potential supplier, Segner said the parts manufacturer must do proper due diligence to ensure it’s not conducting transactions with a sanctioned or denied entity and to maintain proper compliance so that potential fines are avoided.
“Overall, the effect of the coronavirus is going to be widely felt across every industry around the globe,” he said. “Manufacturers, retailers, and distributors will continue to have their supply chains disrupted. However, developing a proactive supply response to the coronavirus is possible with access to the right data.”
Consider contractual obligations
Manufacturers need to consider how the coronavirus affects their contractual rights and duties with suppliers and customers, said Sheldon Klein, attorney and shareholder at Butzel Long, a law firm specializing in employment law and commercial litigation. If the coronavirus should cause it to be difficult or impossible to keep those promises, force majeure, Latin for “superior force” that is a standard clause in many contracts, may apply.
It’s a legal term intended to apply in extraordinary events or circumstances beyond a party’s control. Of course, a global pandemic would qualify as an extraordinary event, but affected parties cannot simply sit on their hands.
Attorney Sheldon Klein discussed contractual obligations and how force majeure may apply to manufacturers and distributors.
Attorney Rebecca Davies gave guidance on employment laws as they relate to the COVID-19 pandemic.
As an example, force majeure doesn’t allow the seller to refuse to fulfill the terms of the contract just because it would cost more to do so by re-sourcing parts or production. One example Klein gave was paying more for shipping, such as air freight. And if a supplier can’t supply a manufacturer a part or material, they can generally claim force majeure, and this same claim applies downstream. The seller must provide prompt notice, and contracts may specify how and to whom that notice is given.
What are the ramifications for employees?
Rebecca Davies, also an attorney and shareholder at Butzel Long, gave some insight on how employers can lawfully handle issues that may come up during the pandemic. She cautioned that the situation may rapidly change and that her advice is based only on Michigan law.
If an employee arrives at work sneezing, coughing, and congested, employers can send them home. But for how long should they remain out from work? Employers can ask for a return-to-work authorization.
“Practically, the healthcare facilities might be overwhelmed if you asked for that,” Davies said. “On the other hand, I’d much rather have a return-to-work restriction and wait for it, if necessary, than have somebody who might be an exposure to our workplace.”
Employers can also inquire about employees’ personal travel and restrict business travel.
“Advise them at the beginning that, ‘If you travel to certain places, you might have to self-quarantine when you return,’ she said.
Employers can also ask if the employee has been exposed to anyone diagnosed with COVID-19, which according to current CDC guidelines, would require a 14-day quarantine. For employees actually diagnosed with COVID-19, the employer needs to inform employees who may have come in contact with an employee so diagnosed so they can self-quarantine, although confidentiality should be protected, when possible.
“At the end of the day, if they connect the dots, so be it. But it’s not HR or the employer identifying who it is.”
Then thoroughly disinfect those areas. Whether employers need to pay for their time off varies, she said.
“Look at your collective bargaining agreement, your paid sick leave policies, or your Michigan Paid Medical Leave Act policy. If it’s not under sick leave or PTO, I want you to compare what they have taken out of those banks already, because they’re not allowed to get additional time just because of the outbreak.”
Whether an employee is an exempt (salaried) or non-exempt (hourly) employee will affect this. Short-term disability policies may apply.
“The laws are changing almost daily, so employers should regularly check with their legal counsel for updates and applicable state laws,” she said.
