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Could pandemic shocks delay Tri-State rebound?

Companies struggle to match supply, demand
Posted: 5:00 AM, Nov 12, 2020
Updated: 2020-11-12 18:31:28-05
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CINCINNATI — George Gilbert was poised to capitalize on the pandemic, but COVID-19 doesn’t obey the law of supply and demand.

Gilbert, a Columbus resident and lifelong water sports enthusiast, sold his Malibu Wakesetter in June after he suffered an injury and received an offer that allowed him to recover what he paid for the boat years ago. Four months later, he was still searching for a suitable replacement.

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George Gilbert wants a new boat by next Spring

“The market’s tight. Buying a new boat is difficult,” said Gilbert, as he arrived for a test drive of Malibu’s latest model at Caesar Creek Lake in Warren County.

Gilbert’s sales rep at No Wake Marine confirms the dilemma. Zach Whitehead normally has about 25 boats in available inventory at this time of the year. But the Blue Ash-based boat dealer now has only seven vessels on its lot.

“The manufacturers are backlogged,” Whitehead said. “The shortages aren’t a good thing. It raises prices, makes things more difficult.”

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In Part Three of the Rebound Investigation, Cincinnati’s Lost Year: Pandemic, Crisis, and Recovery, the WCPO 9 I-Team explores the hidden impact of the pandemic on all facets of life in the Tri-State, from the region’s increase in murders and domestic violence to mental health challenges faced by children and young adults.

Supply-chain disruptions represent one of the most insidious ways the coronavirus has impacted our daily lives, upending the global economy in ways that few could have predicted at the start of 2020. Although it’s not as pressing a problem as the nearly 8 million people who continue to collect unemployment benefits, chaos in the supply chain is making it harder for companies to capitalize on new growth opportunities, create new jobs and lead the way to economic recovery.

The I-Team talked to executives with Procter & Gamble Co., Drees Homes, Wyler Automotive and two local boat dealers to gauge the impact of supply-chain disruptions on local companies. We also talked to local and national experts about how the pandemic could accelerate changes in the Tri-State economy, boosting its reliance on distribution hubs as a catalyst for job growth.

‘We don’t have the goods where we need them’

The McKinsey Global Institute, an economic research organization funded by the McKinsey & Co. consulting firm, estimated in August that the pandemic will cost the global economy $30 trillion in lost economic growth, three times the damage caused by the 2008 recession. Much of that damage will come from chaos in global supply chains.

“Shutdowns and stay-at-home restrictions, while necessary to protect public health, not only halted production but depressed incomes and discretionary spending, deepening the economic fallout and sending ripple effects across industries,” said the McKinsey report. “Indeed, its main impact on some sectors is not a supply chain disruption but rather a collapse in demand. While the ultimate economic losses are still unknown, they extend into the tens of trillions of dollars.”

McKinsey predicted the aerospace and automotive sectors will be among the industries most threatened by the pandemic because they have thousands of suppliers all over the world.

That’s a problem for Greater Cincinnati, which ranked 38th in the U.S. with $12.4 billion in 2019 imports, according to the Observatory of Economic Complexity, which tracks international trade data. The Tri-State also ranks 50th in exports, shipping out $7.3 billion in goods last year. According to OEC, we import medical ingredients, gas turbines and nucleic acids. We export machine tools, aircraft parts and laboratory equipment. But the region’s imports and exports are down sharply from year-ago levels.

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Emily Blanchard

“Companies that are more exposed to trade will see a greater impact” from supply and demand shocks caused by the pandemic, said Emily Blanchard, associate professor of business administration at Dartmouth College’s Tuck School of Business. “They can’t get the inputs that they want or need. Or trade has shifted. They used to sell to Japan, but now they have to seek other markets.”

Blanchard said the pandemic differed from past economic disruptions because governments “showed a willingness to shut borders very quickly, sometimes to shut production facilities and to limit imports and exports. That’s very unusual.”

That brings a new layer of complexity to this crisis that multinational companies like Procter & Gamble Co. and GE Aviation never had to address in past recessions or supply-chain shocks caused by hurricanes, earthquakes and cyber-attacks.

“That’s a super-important and subtle difference,” Blanchard said. “Firms are a lot less certain about government behavior.”

To counter that uncertainty, many companies will look for ways to make their supply chains more resilient by increasing automation and looking for vendors and materials closer to where they manufacture products.

“COVID has accelerated a bunch of trends that were already there,” Blanchard said. “The shedding of jobs, relocating of manufacturing, changing how products are made. There was already a shift toward automation. COVID will accelerate that. There are a lot of people who’ve been laid off who probably aren’t going to be re-employed.”

One of the big questions yet to be answered is how much of the old economy comes back when vaccines and public health initiatives bring the virus under control. In an October 22 interview, Rick Kaglic, senior regional officer for the Cincinnati branch of the Federal Reserve Bank of Cleveland, said a massive shift in consumer spending habits has the global supply chain “jammed up.” But how much of that is permanent?

“Households are buying more goods at the expense of services,” he said. “People are not just buying more goods. They’re buying more goods online. So, we have to move this stuff around. The supply chain logjams right now, I don’t see that as a catastrophic event for the economy. The pandemic is a catastrophic event, but it is going to take time to sort things out. We don’t have the goods where we need them right now.”

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Inventory is light at Hern Marine in Fairfield

‘It’s certainly dragging on the numbers’

The boating industry shows one way this global problem hits home. The boat that Gilbert wants to buy is manufactured in Loudon, Tenn., where Malibu Boats Inc. CEO Jack Springer told investors in August that inventory at its dealerships had reached “historically low levels.”

Springer said Malibu’s three manufacturing plants were back to pre-pandemic production capacity in May, but the companies that supply parts for its products were not. So, he predicted it would be at least June of next year before the company eliminates an inventory shortage of about 1,000 boats.

“While internally, we could increase unit production more, our supply chain partners are dealing with the Covid repercussions and cannot produce to the demand that the entire marine industry is placing on them,” Springer said. “The worst action in this uncertain environment is a knee-jerk reaction to build too much inventory and put our brands in a bad channel position because of factors that we cannot control.”

The boating industry rode the pandemic to a 13-year high, as travel budgets shifted from cruises, airline flights and hotel stays to lake homes, camping trips and back yard pools. The National Marine Manufacturers Association expects 2020 will end with a 5% increase in the number of boats sold, or 189,000 units.

But the pandemic also put a strain on the network of vendors that supply engines, windshields, vinyl seats, navigational technology and dozens of other products that typically arrive just in time to be installed on the assembly line. Many suppliers were temporarily closed in the early days of the pandemic. Others cut back production to account for quarantined workers. An NMMA survey found 58% of boat manufacturers were experiencing supply-chain disruptions at the end of June, down from 71% at the end of March.

“It’s certainly dragging on the numbers that we could hit,” said John-Michael Donahue, NMMA vice president. “But then again, things are getting better and we expect to meet all the demand that is out there.”

Hern Marine Owner Ron Cummins isn’t so sure. The pandemic put a serious dent in his inventory, although his dealership enjoyed a sales year that rivaled its all-time high in 2005 – when it had three locations, not one.

Hern Marine typically has more than 80 boats at this time of year, but only 14 were on display when the I-Team visited in late October. The dealership’s boating supply store is similarly sparse, its empty shelves unlikely to be filled until next spring.

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Ron Cummins

“If we order a boat today, it’s hopeful that it’ll be here by Memorial Day,” said Cummins. Still, this year is preferable to the 2008 recession, when boating sales plummeted to an all-time low and many dealers folded.

“That was a year that you could barely sleep at night,” Cummins said. “And this year, you still couldn’t sleep because you couldn’t make sure that all the customers that had boats on order were going to get them.”

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Inventory is sparse at some Tri-State auto dealerships

Corvette plays hard to get

David Wyler feels Cummins’ pain – and then some. The president of the Wyler Automotive Group has 40% less new-car inventory compared to this time last year. That’s $80 million in lost revenue for a dealer group that enjoyed three straight years of double-digit growth before 2020.

“If we can get into a single digit decline from 2019, I’ll be happy,” said Wyler. “Instead of selling cars it looks like I’m displaying blacktop.”

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David Wyler spoke to the I-Team in an Oct. 13 Zoom interview

Wyler said he has 68 buyers lined up for the Corvette C8, which was introduced last summer. But he’s only been able to fill 14 orders for the popular new sports car, which is assembled three hours away in Bowling Green.

“I have personal friends who’ve had these cars on order for more than a year,” Wyler said. “If you’ve got a Covid case in a supplier plant, it backs up all the way to the dealer side and ultimately the consumer side.”

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Drees Homes is trying to keep pace with housing demand with new subdivisions like Elliott Farm in Loveland.

Housing pipeline gets clogged

In the housing industry, supply chain disruptions could put a pinch on profits and keep builders from satisfying pent-up demand for new homes and apartments.

“We can’t get new appliances,” said Louis Guttman, CEO of Hills Properties, which owns and operates 21 apartment complexes in Ohio, Kentucky and Indiana, including the Fox Chase communities in Anderson Township and Southgate, Ky.

Guttman participated in a Real Estate Roundtable event Oct. 8, presented by the University of Cincinnati and Cincinnati’s chapter of the Urban Land Institute. He said lighting fixtures and labor have also been in short supply.

“It’s been a real challenge getting enough workers to show up on construction sites on a consistent basis,” he said. Guttman said the pandemic made new apartment construction more difficult to finance but rents have been “surprisingly strong.”

So has demand for new homes, said Tim Terrell, chief financial officer for Drees Homes. It’s on pace to sell 2,800 homes nationwide this year, up nearly 22% from 2019. But it’s finding it tougher to meet that demand thanks to shortages of land, lumber, windows and labor.

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Tim Terrell, chief financial officer, Drees Homes

“The market has changed really quickly,” Terrell said. “So there’s not enough lots on the ground or new homes to meet the demand. We have, as an industry, continued to put lots on the ground but there’s still a natural constraint in the market in that there’s only so much labor to go around to build homes.”

So far, Drees has been able to navigate its supply chain challenges without impacting profits or the time it takes to build new homes, but that could change if shortages worsen or the cost of materials rise.

“It really is going to depend on whether this demand stays elevated,” Terrell said. “Right now, we’re running up 60% year-over-year growth, and at that level we just absolutely can’t keep up.”

P&G defies 'most challenging environment'

Procter & Gamble spent more than $1 billion since 2012 to make its supply chain more agile and resilient. Now, it’s enjoying the benefits of those investments as it shifts production to hot new products like Microban, a sanitizing spray that claims to kill 99.9% of bacteria for up to 24 hours.

Chief Financial Officer Jon Moeller told the I-Team October 20 that P&G factories met more than 90% of the demand for its products through the pandemic, thanks to supply chain investments that allow it to ship directly to customers and quickly analyze changes in consumer demand and supply of materials.

“This is clearly the most challenging environment we’ve operated in,” Moeller said. “If you look at a geography like Latin America, which has significant operational challenges related to Covid, we’ve maintained 95% on-shelf availability thus far, which has helped us build market share.”

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Slide show presentation shows Amazon footprint at CVG Airport in Hebron.

Cargo is king

But perhaps the biggest impact of this year’s supply chain chaos will be the role that Cincinnati’s rapidly growing air cargo hub could play in solving the problem. CVG Airport in Hebron is already home to the world’s second-largest DHL hub, but Amazon Inc. is investing $1.5 billion to convert more than 1,100 airport acres into the nation’s largest Prime Air hub. Eventually, it will support a fleet of 100 cargo jets, each capable of making two flights per day.

“Their operation here is going to rival UPS and FedEx and arguably the U.S. Postal Service for package delivery around the world,” said Jeff Bender, vice chair in the Cincinnati office of Cushman & Wakefield. He’s a commercial real estate broker who specializes in logistics and distribution facilities. He predicts Amazon’s hub will be “an enormous magnet for additional companies that want to be here solely because of access to that hub. So, it’s going to be a good thing that our economy is leaning towards that.”

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Rick Kaglic, senior regional officer in the Cincinnati branch of the Federal Reserve Bank of Cleveland.

Kaglic said there is already some evidence that Cincinnati’s growing logistics industry is insulating the Tri-State from pandemic shocks. He said year-over-year job losses in the Tri-State are lower than state and national averages.

“When you take a look at the job losses that Cincinnati has experienced and how many they have regained, a lot of those jobs are coming back in transportation and logistics,” Kaglic said. “It may be a function of Cincinnati’s logistics hub that we are doing a little better than the nation in terms of recapturing jobs.