Business Interruption: Factory Fire Snuffs Out Output of Key Ford, Mercedes Models

By Keith Naughton and Christoph Rauwald | May 11, 2018

A fire at a Chinese-owned auto parts plant in Michigan has cut off supply of key components and disrupted production of crucial Ford Motor Co. and Daimler AG models, with the U.S. automaker already saying it’ll hurt profit in the second quarter.

Ford is shutting down F-150 truck production at its Dearborn, Michigan, factory, after having already idled its Kansas City plant that also makes the popular and highly profitable model. The automaker also has stopped building F-Series Super Duty pickups at a factory in Kentucky, though it continues to make them in Ohio. The shutdowns will adversely impact Ford’s second-quarter earnings, but the company expects to compensate for this later.

“We believe the impact of this will be isolated to the second quarter,” Joe Hinrichs, Ford’s president of global operations, said on a conference call with reporters Wednesday. “We do not anticipate losing any sales as a result of this and we’ll be able, over time, to make up the production.”

The parts shortage has also spread to General Motors Co. and Fiat Chrysler Automobiles NV factories, in addition to leading Daimler to pause production of key Mercedes-Benz sport utility vehicles. The interruptions follow an explosion and fire last week at a Meridian Magnesium Products plant in Eaton Rapids, Michigan, which makes die-cast parts and is owned by China’s Wanfeng Auto Holding Group.

Ford’s Franchise

F-Series pickups generate most of Ford’s profit, with Morgan Stanley recently assigning a higher valuation to the franchise than the entire company. The trucks are the top-selling vehicle line in America and haul in about $40 billion in annual revenue, exceeding the annual sales of companies such as Facebook Inc. and Nike Inc.

“The F-Series platform is critically important to Ford,” said Emmanuel Rosner, an analyst with Guggenheim Securities LLC. “We estimate it generates annual profits of at least $12 billion for the company, accounting for much more than the totality of Ford’s global” profit.

Ford fell 1.9 percent on Wednesday to close at $11.06. The shares have dropped 11 percent this year.

“The going assumption is that the lost units will be mostly recoverable over the course of the year,” Joseph Spak, an analyst for RBC Capital Markets, said in an note to investors. “However, the longer the downtime, the tougher this gets.”

‘Hour to Hour’

The fire in the supplier plant lingered and was difficult to contain because the magnesium that ignited couldn’t be extinguished with water. Meridian plant manager George Asher told Automotive News that the company is working to move dies for stamping parts to its plants in Ontario and the U.K.

Ford said it extracted from Meridian’s plant all the tools used to produce magnesium parts for the F-Series, the Expedition, Explorer and Lincoln Navigator SUVs, as well as the Ford Flex and Lincoln MKT crossovers. The automaker is trying to move those dies to other supplier factories, including the Meridian plant in Ontario.

“We have to rebuild the whole supply chain,” Hinrichs said. “It’s really a day-to-day, hour-to-hour situation. We have a plan developed on how to get production started back up, but it’s going to take some time to make that happen.”

Hinrichs declined to project when Ford would resume production.

No Easy Substitute

There are relatively few suppliers of magnesium parts, which means the auto companies could be without critical components for some time.

“There’s not a lot of this type of supplier around that has capacity to pick up that kind of volume,” said Kristin Dziczek, an economist and labor expert at the Center for Automotive Research. “This isn’t like picking up screws at the hardware store.”

The production disruptions underscore the vulnerability of complex supply chains in the global auto industry, which relies on just-in-time deliveries of parts directly to assembly lines to boost efficiency and save costs.

Meridian’s Eaton Rapids factory supplies lightweight cast-metal parts for global automakers, which are using more materials such as magnesium and aluminum to reduce weight and improve fuel efficiency.

Fiat Chrysler said the parts shortage has impacted production of the Chrysler Pacifica minivan at its Windsor, Ontario, plant, and it’s adjusting production schedules to minimize downtime. GM has halted production of the Chevrolet Express and GMC Savana full-size vans at its Wentzville, Missouri, factory, but continues to build Chevy Colorado and GMC Canyon pickups there.

Mercedes employs about 3,700 people who build about 286,000 vehicles annually at its Tuscaloosa, Alabama, plant, including the GLE and GLS SUVs and the C-Class sedan. More than 70 percent of SUV output is for export. Mercedes is investing $1 billion at the site for production of electric cars, including battery manufacturing, and to expand logistics operations.

Ample Supply

Ford said earlier Wednesday that it halted production of Super Duty trucks – the F-250 through F-750 pickups – at factories in Ohio and Kentucky, but Hinrichs clarified that production of those models only stopped in Kentucky. Super Duty production continues in Ohio, along with Econoline commercial vans. And Ford hasn’t stopped building the Expedition and Lincoln Navigator full-size SUVs in Kentucky.

“We have a good supply of materials for Expedition and Navigator, so we see that production continuing for quite some time,” Hinrichs said, adding that Ford continues to build the Explorer in Chicago.

Despite the shutdowns, Ford said it has 84 days’ supply of F-Series, which exceeds the roughly 60-day level that’s generally considered an ideal amount of inventory.

“Customers won’t have any trouble finding the F-Series,” Erich Merkle, Ford’s sales analyst, said in a statement.

Still, the F-Series is so important to Ford that Guggenheim’s Rosner is considering adjusting earnings projections for the automaker once the full effect of the supplier fire is known.

“We will likely revisit our earnings estimates for Ford and its main suppliers once there is more clarity on the extent and magnitude of the production downtime,” Rosner said.

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