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Coronavirus Risk AssessmentAuto Part &AutomobileManufacturing

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Insurance Industry Original Equipment Manufacturing

Insurance service providers supporting automotive companies through business interruption insurance plans

(i.e. supply chain, liability and event cancellation insurance) are vulnerable to be negatively impacted by rising instances of claim payouts as car manufacturers

face significant interruptions to their operations and supply chains, posing a financial risk to the greater auto

part and automotive sector.

Original equipment manufacturers (OEMs) and auto part manufacturers are experiencing an inability to source key

inputs and factory closures as a result of travel restrictions, increasing financial risk for important automobile part manufacturers. OEMs that heavily depend on Chinese supply chains have the most

significant risk exposure due to the outbreak.

Car Manufacturing Industry

The world’s largest car manufacturers face significant risk from the escalation of the coronavirus as automobile assembly lines experience a shortage of key auto parts

and automobile manufacturers are required to close factories or significantly cut production capacities. The

inability to resume normal manufacturing operations as a result of the coronavirus outbreaks poses significant risk

for car and automobile manufacturers.

Specialized Vehicle Industry

The specialized vehicle industry (e.g. emergency response, customized commercial and heavy

vehicles) is negatively impacted by the escalation of the coronavirus as travel restrictions result in

sharp declines in demand for specialized transportation services and place downward pressure on revenues and demand for new

specialized vehicles, increasing operational and financial risk for companies operating across the

automotive industry.

Commercial Lending Industry

The escalation of the COVID- 19 (coronavirus) outbreak will place downward pressure on the volume of new car

purchases and, subsequently, demand for loans to finance the cost of a new autos. Many major car manufacturers own and operate financing/lending departments called

captive finance companies, which account for more than 25.0% of annual car loans in the United States. Commercial loan providers and captive finance companies will face less

demand for lending services, thereby increasing financial risk for these institutions.

Risk Level Key

Medium

High

Low

Industry Risk Analysis

The escalation of the coronavirus will continue to place downward pressure

on near-term sales and revenues of companies with high levels of risk exposure (e.g. transportation and

medical companies). Weaker corporate confidence and falling capital

expenditure will contribute to weaker corporate demand for new

automobiles.

Supply ChainRisk Analysis

Key Suppliers Vendor Key Buyers

Raw Material Suppliers

Raw material suppliers (e.g. aluminum, steel, glass and rubber manufacturers) are exposed to high levels of risk. Risk stems from waning demand for raw

materials as a result of chilled economic activity and travel

restrictions, threatening massive declines in raw materials prices and

downward pressure on the average raw material supplier’s profitability.

Automotive Part Manufacturers

Because China exports an estimated $70 billion worth of car parts and accessories around the globe annually, factory shutdowns

and travel restrictions across China have resulted in a growing

shortage of key components, crippling automotive supply chains

around the world. Initial key shortages include infotainment systems and audio equipment

because they rely on semiconductor chips that have limited supply networks. Buyers should note that this vendor also

functions as a key supplier for automobile manufacturers.

Automobile Dealer Networks

US Corporations

Consumers

Investors and economists warn that exaggerated public concern as a result

of misinformation about the coronavirus spread through social

media will affect the day-to-day consumer’s psychology, likely to place

downward pressure on demand for new vehicles.

The coronavirus outbreak is forecast to place downward pressure on demand

for new automobile purchases, increasing risk exposure for automobile

dealerships responsible for financing and selling new cars. Although the Independent Automobile Dealers

Association of California has stated that the coronavirus has “not been an issue

for members,” the escalation of the virus poses significant risk to demand for new cars purchased at dealerships,

exemplified by a dramatic decrease in demand across Asian automobile

dealerships.

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Automobile Manufacturers

Major automobile manufacturers (e.g. Toyota,

Hyundai and Fiat Chrysler) are facing assembly line

shutdowns. The shutdowns are due to supply chain disruptions

and an inability to source key inputs, forcing car

manufacturers around the world to reduce production capacities

for key vehicles and revise annual revenue forecasts lower.

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Mitigating Supply Chain Risk

Related Market NewsThe US financial services company, Moody’s, revised its 2020 global vehicle sales forecasts down 2.5% as a result of the coronavirus outbreak.

The Italian-American automaker Fiat Chrysler halted operations at a factory in Serbia due to a lack of parts from China because of the coronavirus.

Honda has publicly warned that there is a high likelihood that the automotive company will experience some temporary interruptions to North American vehicle production as a result of shortages of a few critical parts from Japan.

Best Practices for Auto Parts & Automobile ManufacturingOperators are advised create a devoted team. Key auto part suppliers, including Dana, Aptiv and Adient, are creating specialized teams devoted to monitoring inventory levels and supply chains, including precautionary procedures for employees.

Auto manufacturers should begin mapping out alternative input suppliers in the event the escalation of travel restrictions inhibit normal procurement processes. This is especially important for companies that are dependent on an auto part supplier with a large share of the global market located in a country with high risk of escalation of the coronavirus outbreak.

In the event an auto manufacturer or automotive OEM anticipates a shortage vital inputs, they should also consider plans to ration the remaining inputs with high risk of shortages as a result of coronavirus-related supply disruptions (e.g. airflow sensors) to their highest margin product lines.

Major automotive companies are developing contingency plans in the event travel restrictions are expanded to cities outside of Asia. For example, Volkswagen has been training thousands of dealers to use specially developed chat rooms and online platforms to offer online test drives and continue selling cars.

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VendorRisk Mitigation

Company-Wide Best Practices

Designate a company director as the coronavirus “point person”: In an effort to mitigate risk across an organization, companies should consider selecting a single person (ideally a human resource professional, someone in the legal department or a workplace health professional) to be involved in all personnel decisions related to the coronavirus.

Develop risk-appropriate contingency plans: Companies should ask themselves: “How do we quantify our direct and indirect risk exposure to market disruptions stemming from the escalation of the coronavirus outbreak?” Companies should map out what inputs are core to their business and also have a high-risk exposure to economic disruptions stemming from further outbreak of COVID-19 and develop subsequent contingency plans based around these high-risk inputs.

Ensure contingency plans are consistent with existing employment and health laws: In the United States, employers may consider sharing the Equal Employment Opportunity Commission’s (EEOC) Pandemic Preparedness in the Workplace amongst their employees. These guidelines specifically warn that testing an employee’s temperature may be unlawful and considered a medical examination under the Americans with Disabilities Act (ADA) unless such action is clearly advised by proper health authorities or where the employer can show the employee poses a direct threat to the health and safety of other employees.

Develop contingency plans to manage technology risk: These risks include, but are not limited to, the capacity to enable a large number of employees to work remotely, an increase in online traffic to web-powered platforms and a rise in cybersecurity threats/attacks.

Clear and consistent internal and external messaging: Communication and messaging is one of the most important considerations for organizations to consider. As evidenced by the subsequent backlash to the Chinese government’s response to the outbreak and their mixed messaging on the evolving severity of the outbreak, companies too have their personal brands and reputations on the line as they draft contingency plans.

Best Practices Checklist

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VendorRisk Mitigation

Day-to-Day Best Practices

Best Practices Checklist

Implement more frequent and stricter office cleanliness requirements: Employers can provide N-95 face masks, sanitizers, increase the rate of office cleaning and publish informational reminders for washing their hands and best practices for preventing the spread of germs.

Consider shifting employee responsibilities in a defined business continuity plan: Management teams should consider the reallocation of responsibilities between employees and/or establish new procedures for remote employees in the event travel restrictions are implemented.

Develop policies for clear communication with customers: It is important to develop procedures for communication with customers and understand the overall impact on the firm’s ability to service customers. Firms should determine how customers will be notified about any restrictions to market services.

Consider implementing split team arrangements: Split team arrangements refer to when personnel and employees are split into two or more teams (e.g. Team 1 and Team 2) that are deployed with different work schedules or at different work sites to prevent the spread of the virus.

Implement flexible working arrangements: Organizations should consider allowing employees to work from home in order to prevent contamination.

Carry out testing measures in “high-risk” work environments: The EEOC’s Pandemic Preparedness in the Workplace warns that testing an employee’s temperature may be considered a medical examination under the Americans with Disabilities Act of 1990 (ADA) unless clearly advised by proper health authorities or where the employer demonstrates the employee poses a direct threat to other employees based on objective medical evidence.

Implement internal controls to prevent human-to-human transmission: Companies should consider catering lunches and meals to minimize employee’s exposure to crowded areas like the food centers, supermarkets and restaurants.

Restrict employees from returning to work if they have recently visited a high-risk area: Many employers have adopted a 14-day or longer work-from-home policy for any employee that has recently returned from China or another country with high risk of contracting the virus.