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Michigan manufacturing expected to be especially hard hit by coronavirus

Kalea Hall
The Detroit News

Detroit — The coronavirus will disrupt U.S. manufacturing, and when it does it will hit Michigan harder than most states, experts say.

Michigan's manufacturing roots — with 14.2% of employment based in manufacturing compared to 8.5% nationally — will leave it more exposed to the potential for production slowdowns and layoffs from the virus' impact on supply chains. Businesses are working to mitigate the risk to their overall business and bottom lines.

The coronavirus will disrupt U.S. manufacturing, and when it does it will hit Michigan harder than most states because of its dependency on the auto industry, experts say.

"Manufacturing is more vulnerable because of supply-chain disruptions," said Gus Faucher, chief economist for PNC Financial Services Group. "Michigan is much more vulnerable to those types of problems compared to the rest of the U.S." 

Automotive manufacturing in particular will be hurt because of its deep supply chains, and Michigan is more dependent on that sector than any other state.

"I would not be surprised to see some auto parts manufacturers and perhaps even the big auto companies themselves start to reduce production because of an inability to get parts," Faucher said.

The Michigan Economic Development Corporation says it's monitoring the situation. "It is, however, too early to speculate on what the impact has been or will be moving forward," spokesman Otie McKinley said.

Even though some businesses have contingency plans for parts, experts don't see how the virus won't have some effect, though automakers haven't said it's hurt anything yet.

"I think it's absolutely going to have some impact on production in North America because we source not only stuff from China but stuff from other countries that has Chinese content," said Kristin Dziczek, vice president of industry, labor and economics at the Ann Arbor-based Center for Automotive Research. "We haven't seen this kind of viral outbreak with this level global integration on the supply chain to really know what's going to happen."

The impact could be as minimal as an automaker not being able to provide a certain trim level of a vehicle — or it could be more damaging. Slowed production or layoffs could result.

"It’s going to be expensive and at the minimum that will affect growth because if you’re a business and your costs go up and in the short term revenues go down ... then you’re squeezed what’s going to happen to your earnings," said Linda Lim, professor emerita of corporate strategy and international business at the University of Michigan's Ross School of Business. "Earnings are going to hit by either rising costs or lower revenues or more likely both." 

Detroit 3 impact

Ford Motor Co. Chief Operating Officer Jim Farley said this week the coronavirus crisis would “handicap” the automaker and lower its financial guidance for the year, but it's too early to determine by how much.

The automaker expects to restart its normal office operations next week in China and has already resumed production at its 11 plants there. 

Fiat Chrysler Automobiles NV in its annual report filed this week said the virus is a risk to its business in China and abroad since it could disrupt supply chains. "The ultimate severity of the coronavirus outbreak is uncertain at this time and therefore we cannot predict the impact it may have on our end markets and our operations; however, the effect on our results could be material and adverse," the company said.

Fiat Chrysler's two manufacturing operations in China have restarted production and there's "no immediate impact" on the automaker's other manufacturing operations, a spokesman said in a statement Thursday.

General Motors Co., which has 15 manufacturing sites in China, implemented a staggered start to production beginning Feb. 15. It will not restart its facilities in the Hubei Province — the epicenter of the outbreak — until March 10, per government orders.

The United Auto Workers Local 598 in Flint recently told members on the local's smart phone app that production there could be hurt, but GM said to this point there's been no impact on North American production.

Alarms sounded

Some auto component suppliers have started warning their clients of potential disruptions.

Most manufacturers source components from overseas, especially China. Michigan imports from China are mostly for the automotive industry, according to U.S. Census Bureau data. There's also the uncertainty of not knowing if outbreaks will lead to quarantines and plant shutdowns in the U.S.

"There will be an impact," said Ray Telang, PwC's U.S. auto leader and Detroit managing partner who works with clients on supply-chain management.

"The question is when from a production perspective," he said.

Sheldon Klein, an attorney at Butzel Long’s Bloomfield Hills office who represents automotive industry suppliers, has been advising his clients in asking their customers for excusable delays in the event the virus interrupts delivery of certain parts. The firm will put on a webinar next week to help them through that process.

"Will there be assembly plants shut down? I would be surprised if there aren't ... maybe sooner rather than later," Klein said. 

The good news is most big companies can adapt quickly because they have handled disruptions caused by natural disasters and trade issues. But smaller, less sophisticated businesses are likely to be more challenged, PwC's Telang said.

"People are looking at their supply chains with a fine-tooth comb to ensure they have enough flexibility to address and or react to not only what’s happening right now with the coronavirus, but any other kind of disruption," Telang said.

Other industry at risk

Michigan tourism also could take a hit this year. And international tourism is expected to drop because of the virus, which could hurt the Michigan economy because Detroit Metropolitan Airport, a hub, will likely see less traffic coming in and out.

PNC economist Faucher also pointed to major universities in Michigan with large populations of international students; disruptions with those students traveling from their home countries could hurt the state's economy.

Faucher expects slower economic growth in the U.S. in the first half of the year, mostly because of the virus.

"I don’t think the economy’s prospects have gotten that much worse over the past four days," he said. "Assuming that this fades and it becomes less of a problem, then I expect growth to tick back up in the second half of this year."

khall@detroitnews.com

Twitter: @bykaleahall