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Commentary & Voices

Production Disruptions at Meridian Magnesium Products of America

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The full extent of a recent fire at auto parts maker Meridian Magnesium Products of America in Eaton Rapids, Michigan, is beginning to come into view. The fire disrupted production at the plant and the ripple effect is now being felt by automakers across the country. Cox Automotive analysts offered the following insights and commentary.

Charlie Chesbrough, Senior Economist, Cox Automotive:
The automotive industry is heavily connected through the supply base. We saw this inter-reliance clearly in 2011, when the Japan earthquake and the Thai flood disasters halted OEM manufacturing in the US. Further, during the 2008-2009 financial crisis, the great concern was that the collapse of one large supplier would be a tipping point to bringing OEMs, and other suppliers, down as well. As with all similar issues, the one key question is how long? A short-term disruption can often clear out inventory and allow for strict pricing. A long-term shut down can be much worse. In Ford’s case, the timing is difficult with the new Ram truck in market and new Silverado coming this summer. A major disruption could not come at a worse time for Ford—70,000 sales each month are at stake.

Michelle Krebs, Executive Analyst, Autotrader:
It’s too early to say how serious the situation is until some questions are answered: How fast can the supplier get back up and running; how fast can affected assembly plants resume production and possibly make up for lost output with overtime? We’ve seen this before, where one supplier can have a major impact across the industry. Virtually no automaker was untouched by recalled Takata airbags, for example. In an effort to be as efficient as possible, most automakers have limited the number of suppliers. That can help the bottom line, but when something goes awry, the impact can be significant and widespread.

Rebecca Lindland, Executive Analyst, Kelley Blue Book:
When these disasters hit, the outcome always depends on when the supplier can recover, the inventory levels already in place, and how customers react: Do they wait for the product they want or do they defect? It’s a story of unknowns, and it’s all related to the duration of the shutdown and the automakers’ and dealers’ response to it. This will likely cause short-term distress to the supplier and affected automakers. Long-term, both will recover.

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