Hurdles remain for an auto industry recovery as Detroit plants reopen

The Detroit automakers on Monday started producing vehicles in the U.S. for the first time since late-March, but there are no guarantees that they’ll be able to continue to successfully do so while the coronavirus pandemic continues to kill thousands of people every day in the U.S.

The reopening of plants for General Motors, Ford Motor and Fiat Chrysler will test their capital-strained supply chains, coronavirus safety protocols and consumer demand. All three must be in tact for any hope of a steady recovery for the U.S. auto industry.

“Those are really the hurdles that are coming,” said Stephanie Brinley, principal automotive analyst at IHS Markit. She said it’s doubtful the industry would once again completely shutter, but the automakers and their workforces need to remain flexible and adapt to any changing circumstances.

“It’s really hard to say specifically what would trigger an actual shutdown,” she said. “It depends on what happens, how well it’s maintained and how well it’s responded to.”

The Detroit automakers and others have taken steps to assist with all three issues. They’ve implemented extensive safety protocols for workers and attempted to provide time for suppliers to come back online. For demand, they’re offering 0{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} financing of up to 84 months as well as big discounts on vehicles.

While U.S. retail sales were down by about 41{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} during March and April, they have been more resilient than expected during the coronavirus pandemic, according to J.D. Power. When the “stay-at-home” or “shelter-in-place” orders were initially enacted some expected U.S. sales to fall by up to 80{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f}.

“We continue to see evidence that we are over the worst and we are firmly in recovery,” said Thomas King, J.D. Power president of data and analytics, earlier this month.

Such continued demand, particularly for pickup trucks, provides a base for production to restart for the Detroit automakers despite historic unemployment and a volatile economic environment, according to officials. 

Daimler was one of the first to reopen last month, producing Mercedes-Benz vehicles in Alabama. It became the first to shut back down this week due to a supplier parts shortage.

“The management is monitoring the situation diligently and will decide on short notice to start operations as soon as possible,” the company said last week in an emailed statement.

That’s something the Detroit automakers would like to avoid as they gradually restart their plants in the coming weeks, if not months.

GM has said it could have its plants back up and running to pre-pandemic levels in the next four weeks, while Ford Chief Operating Officer Jim Farley said it’s “too early to tell” when it will be back to producing where its was ahead of the coronavirus pandemic. Fiat Chrysler CEO Mike Manley has said “production levels will be aligned to consumer demand to ensure we do not build up inventory.”

Ford, for example, is keeping some of its plants closed for at least another week, while starting to operate on two shifts at its plant near Detroit that assembles its popular F-Series pickups. 

GM and Fiat Chrysler are taking similar measures to slowly ramp up production, prioritizing pickups and SUVs over slower selling cars. They are also operating just one shift at their plants, instead of two or three a day.

All three of the automakers worked with the United Auto Workers union to reopen their U.S. facilities as well as local public officials.

The reopening of plants is being closely monitored by other industries as well as government officials as a test of whether social distancing and coronavirus safety protocols for densely populated work areas such as assembly plants can successfully reopen without a resurgence of Covid-19.

To keep workers safe, the automakers have to implement new rules that ensure employees are kept at least 6 feet apart, frequently sanitize work areas and monitor employee temperatures. They’ve had to reconfigure their factory floors to accommodate the changes. 

“We have drawn on our collective global expertise and best practices to rethink our production processes to put in place comprehensive protocols to keep our workforce safe,” Fiat Chrysler’s Manley said in a statement. “There is no question that coming to work will look and feel different.”

Some of those changes include plastic screens or barriers being installed along assembly lines to separate workers, redesigning workspaces when possible for less interactions and mandatory wearing of face masks or shields.

The automakers also have redesigned lunch and break areas, established new procedures to enter and exit facilities and have arranged testing protocols for anyone believed to have contracted the disease. That’s in addition to pre-training exercises related to Covid-19 and pre-work health questionnaires.

“The UAW will continue to do everything we can to protect the health and safety of all members as plants reopen,” UAW President Rory Gamble said in a statement Sunday. “We will continue to be vigilant in protecting the health and safety of our members, their families and their communities.”

The UAW did not have an estimate on how many of its 150,000 members with the Detroit automakers are back to work as of Monday. Both Fiat Chrysler and GM said about 12,000 employees for each returned to work Monday. Ford declined to provide an estimate.

 Union spokesman Brian Rothenberg, in an email to CNBC, said that the reopening of the plants “has been smooth” with staffing levels at or exceeding where they were expected. 

Unlike major automakers, which have billions of dollars in cash available, many suppliers weren’t prepared for such a drastic downturn in the economy.

The coming weeks, as automakers attempt to reopen and ramp up U.S. factories, will be trying times for suppliers, particularly small-to-medium-sized companies.

Julie Fream, CEO and president of the Original Equipment Supplier Association, a trade group representing hundreds of auto suppliers, previously told CNBC that the industry needs an influx of around $20 billion to $25 billion as soon as possible to avoid widespread dislocation, including bankruptcies.

S&P Global reported last month that the odds of default for auto parts suppliers jumped in April, leading to expectations of increased consolidation and bankruptcies.

Executives with each of the automakers have said they’ve been working closely with their suppliers to ensure a successful return to production without much, if any, supply issues.

U.S. Sen. Gary Peters, D-Mich., told CNBC’s “Squawk Box” on Monday that it’s imperative the auto industry restarts to assist in the country’s economic recovery.

“The auto industry is such a jobs multiplier. It’s such a powerful force in manufacturing and the U.S. economy, the quicker the auto industry can come back, the quicker the entire U.S. economy can come back,” he said.