Social distancing for a global auto supplier

Tokyo — The management team of auto supplier Continental AG's Japan operations was just returning from a mid-February winter test drive on the snowy northern island of Hokkaido when coronavirus alerts began.

The immediate issue wasn't so much people getting sick, but what the outbreak might mean for the supply chain feeding Japan's domestic industry, which pumps out more than 8 million passenger vehicles a year. Chinese suppliers were already tangled up in widespread shutdowns.

"We all thought it would be contained in China," recalls Bert Wolfram, CEO of Continental Automotive Japan, the German supplier's local subsidiary. "At that time, things weren't considered so critical here, and in Japan the infection rates were still low."

Continental supplies a wide range of auto parts from functional under-the-hood valves and pumps to seals, electronics and tires.

But by mid-February, Japan began detecting localized transmission of the coronavirus, and attitudes began to shift. The disease was striking close to home. How the Japanese business arm responded provides a glimpse of the decision-making and repercussions going on in the far-flung corners of the industry's international companies as they cope with the worldwide crisis.

Wolfram first raced to secure the safety of Continental's 1,600 employees in Japan while reinforcing its ability to keep delivering to customers throughout the crisis.

Wolfram managed to do both by quickly rolling out work-from-home policies and enacting a disaster contingency plan already on the books to ensure supply chain continuity.

"The biggest concern from the beginning was always the safety of our employees," Wolfram told Automotive News. "If you don't watch out from the beginning, you see where it can go."

Despite being one of the world's largest industrial and commercial centers, Japan so far has managed to avoid a blanket lockdown by practicing mild social distancing and telework programs. But health officials now say more action is needed, and Tokyo's governor has raised the lockdown specter if infections continue to surge.

Japan's prime minister said Wednesday, April 1, it would be difficult to enact a strict lockdown as in Europe. But he warned that Tokyo and other big cities stand at the brink of explosive infection rates.

Japan has banned entry to the island nation of citizens from more than 70 countries and territories, including the U.S., Canada, China, South Korea and most of Europe.

"Right now, the worst-case scenario is that the Japanese government enacts further steps," Wolfram said. That would mean that "people we still have working from the office — because they carry out work which is extremely difficult or impossible to do remotely — can't get back into the office.

"That is the next level of escalation — nobody at all could come to the office anymore."

Such duties cover certain administration tasks still handled by paper in Japan, such as human relations or finance work. But it also includes driving tests, laboratory work, product validation or other design work that requires powerful computers only accessible on-site. Continental also has a factory in Japan with 200 workers making electronic brakes and electronic stability control units.

In some ways, Continental Japan's concerns mirror those confronted by automakers and suppliers in the U.S. and Europe, where some lockdowns are in place.

But Japan so far remains a stoic holdout in allowing much economic activity to continue. Continental Japan is on pins and needles anticipating stricter measures that may force people home and halt commerce.

A supplier survey by IHS Markit found that 46 percent of parts makers in Asia, mainly China and Japan, said they believed the disruption from COVID-19 has been contained. By comparison, nearly two-thirds of European suppliers said their businesses are suffering a severe impact.

Japan's optimism could fade if government guidelines tighten or more plants go offline.

Until February, Continental Japan was focused on ensuring a smooth supply of components to its own factory here and to customers' plants. Wolfram's team met to discuss special measures, including expediting parts shipments by plane if necessary. But its supply chain remained solid.

That is a reflection of a different national crisis. Continental, like nearly every supplier doing business in Japan, took steps to disaster-proof its network in the wake of this country's deadly earthquake-tsunami-nuclear meltdown disaster in 2011. Continental identified alternate production locations in different regions that could serve as backups to each other in case one region was knocked offline by an emergency.

Thanks to a huge manufacturing footprint in China, Continental knew how to deal with the coronavirus outbreak. That gave the Japan business had a head start on dealing with the epidemic when it arrived. Even Continental's German parent company leveraged the experience in China to prepare other regional operations for a possible pandemic.

"We could learn from China," Wolfram said. "They were a couple weeks ahead of us."

After consulting with the home office, Wolfram quickly swung into action to prepare for the worst.

He established a crisis response team at the local Yokohama office with representatives from finance, technology, communications, human relations and building management.

It began with extending flex-time working hours and canceling unnecessary gatherings. The countermeasures quickly snowballed to include travel restrictions, working from home and relying more on video conferences. Cleaning crews started making twice-daily sweeps through offices to wipe down surfaces, light switches and door handles.

"Shortly after that, we went from 'recommend home office' to 'work from home office to the maximum extent possible,' " said Wolfram, who is still holed up in his home in Tokyo.

About 75 percent of Continental's Japanese office workers were doing the same at the beginning of last week, and Wolfram expected the percentage to increase.

In the first days of April, Continental Japan hosted an induction ceremony — updated for the times — for 22 graduate students about to begin a 24-month training program with the company.

Practicing prudent social distancing, trainees were invited to the office, spaced out in a conference room and given face masks. Each trainee was assigned a work laptop and sent off to start the program for the first couple of weeks, mostly from home.

At press time, Continental's factory in Japan was still operating, but taking it day by day. Worldwide, some 40 percent of the supplier's production sites are down, and last week, the head office in Germany withdrew its earnings and sales outlook for the year over the uncertainty.

Continental AG said that in Germany alone, about 30,000 employees, or half of its work force, will be moving to reduced working hours. That may continue for six to 12 months, the company said.

In Japan, even if the government doesn't order workers to stay home in a bid to slow COVID-19 transmission, Continental may have to cut back or suspend production at its plant here anyway: Japanese customers are shutting down local assembly and don't need the parts.

"We have enough supply for our customers, but they don't need much anymore," Wolfram said, adding that it is hard to forecast which way the market or government guidelines will turn.

"There will certainly be an impact on the global production," he said. "But how long and how deep, nobody knows. Nobody really knows."