Car manufacturers and vehicle repair companies are feeling the ripple effect of the coronavirus outbreak which is causing a global shortage of car parts. This could see motor insurers faced with higher settlements as increased waiting times for car repairs may mean that credit hire replacement cars are the only option.
The motor industry is heavily reliant on parts from China, ‘the world’s factory’, which accounts for more than £30 billion in motor parts production globally. The outbreak has caused many factories across China to close or to curtail operations in a bid to minimise the spread of the virus.
Some plants have reopened but there are still worker shortages and it may take time before the factories are fully operational. The impact on the supply chain and sales could take many months to dissipate.
Britain’s biggest car maker, Jaguar Land Rover, has warned that it may not have enough parts from China to maintain its production beyond mid-March. Nissan temporarily shut one of its factories because it cannot obtain parts from China.
JCB, a manufacturer of heavy equipment, has cut production and working hours as it faces a shortage of components from China.
Along with reduced manufacturing output, there is also the issue of exporting goods from China. Many air carriers (Cathay Pacific, UPS) have reduced or cancelled their flights to China. The shipping industry has seen a backlog of containers building up at major ports. So whilst parts may be manufactured and dispatched, there remains limited means of export to the UK.
Not only do British car manufacturers rely on parts from China, but also car repair companies. This may have a knock on effect on motorists and their insurers as they face a shortage of repair parts.
Motorists may have no option but to use hire cars for longer periods and insurers may be left to pick up the bill for these extra hire charges.
If repair companies face a shortage of parts and cannot finish a job, they may seek to recoup loss of profits under their business interruption policies. Whether the losses are covered is another matter; insurers may seek to invoke exclusions or force majeure clauses. Indeed, many policies have deliberate exclusions for epidemics and pandemics.
The electronics, technology and pharmaceutical industries rely heavily on Chinese suppliers. They too can anticipate significant disruption to their supply chains which may prevent completion of finished goods. For example, Apple has warned that there may be a global shortage of iPhones.
Some supply chain experts have said the virus has exposed the motor industry’s lack of adequate contingency planning. Some companies have a Plan B which is another manufacturer in China, and that is obviously not a solution in the current situation.
No doubt current events will lead to discussion about Plan B in the event of future epidemics or natural disasters.
Meantime, the global economic effects of the virus have not fully crystallised and there is still time for companies to limit their supply chain exposure by broadening their range of suppliers.