Manufacturers shift focus to supply chain issues

6 min read

This is the latest weekly update from Santander’s aerospace, advanced manufacturing & rail team on how the coronavirus pandemic is affecting our clients and the sector as a whole.

Manufacturers shift focus to supply chain issues

Santander is pleased to see that most manufacturers in the aerospace, advanced manufacturing and rail sub-sectors are managing to maintain some level of production. The results of a recent survey carried out by our regional aerospace partner, Midlands Aerospace Alliance (MAA), give some insight into how firms are responding so far to the crisis. It found:

  • Manufacturers in the sub-sector are making greater effort to monitor and communicate with their supply chains in order to anticipate future delivery problems.
  • The pandemic is having a mixed impact on lower-tier supply chains, and most manufacturers have been informed of potential disruptions.
  • Aerospace suppliers are facing a range of challenges from reduced staff levels and morale to cash flow difficulties.
  • Businesses are introducing new working practices to respond to the health and safety challenges presented by the crisis.

Among major firms in the sector, Airbus has withdrawn its 2020 guidance as well as its proposed 2019 dividend. Production in France is now running at around 80% of capacity, while operations in the UK and Germany are at normal levels. Airbus should announce its new build rates in the next few days, with firms in the supply chain responding in turn – production cuts and job losses throughout the global supply chain are seen as inevitable.

Boeing suspended production at several facilities last week to implement safety measures, although it now appears that a number of these sites are to remain closed indefinitely.

In the rail sub-sector, rail operating companies (ROCs) and carriers remain under pressure due to the dramatic drop in passenger numbers, while manufacturers are also suffering as demand falls. The industry is calling on major end customers, such as the Department for Transport and Transport for London, to relax contractual penalty clauses for issues such as late delivery. This will help businesses in the supply chain cope with coronavirus fallout. One positive development is the news that Network Rail has pledged to pay its suppliers straight away to help them overcome cash flow issues.

Spotlight set to fall on OEMs

We expect to see an increasing focus in the weeks ahead on the issues facing the global supply chain for original equipment manufacturers (OEMs) across all sectors. Major OEMs are generally well positioned to survive the pandemic thanks to factors such as geographical diversification and solid levels of capitalisation. The same may not be the case for many of the smaller businesses that make up their supply bases.

Looking back to the financial crisis, it is estimated the total number of global suppliers fell by as much as 20% in the recession that followed. There are increasing concerns today that the distance many OEMs have put between themselves and their supply chains may work to their disadvantage when they come to ramp production back up as the coronavirus crisis begins to subside.

As such, OEMs may decide to use the current downturn as an opportunity to analyse their supply chains. This will enable them to prioritise the throughflow of the parts and raw materials most critical for revenue generation, rather than simply taking steps to support the suppliers where they spend the most money. As well as helping production get back up to speed more quickly, this approach also has the potential to resolve longer-term sustainability issues.

Manufacturers welcome government support

The measures put in place by the Chancellor of the Exchequer, Rishi Sunak, to support businesses affected by the coronavirus crisis have been largely welcomed by manufacturers’ organisation MakeUK. Ahead of the Easter break, Sunak revealed that £90bn of business interruption loans have now been approved, supporting almost 1,000 firms. A further £1.9bn has been provided in the form of corporate finance.

There has been more evidence of the vital role manufacturers of all types are playing in producing the medical equipment vitally needed all over the world to help health services deal with the pandemic. The UK’s aerospace and advanced manufacturing companies joined automotive and medical sector companies in a consortium to produce 10,000 medical ventilators for the NHS at a rate of around 1,500 per week. The consortium includes Airbus, GKN Aerospace, Meggitt, Rolls-Royce and Siemens UK. Two types of ventilators are to be manufactured in the UK, by Penlon and Smiths Medical with the help of the Ventilator Challenge Consortium to quickly scale up.

Elsewhere, several other companies, including some from the rail sector, are also helping to produce vital personal protective equipment.

In the United States, meanwhile, President Trump has invoked the Cold War-era Defense Production Act to compel medical equipment maker 3M to prioritise sales in the US over foreign customers. At the same time, Chinese producers say that soaring demand has caused the price of medical-grade face masks to rise by a factor of 20.