Supply Chain Management

Continued Pressure on Automotive Supply Chains

According to a recent Reuters article, Global supply chain stress at 18-month low in July, NY Fed’s index at its lowest level since January 2021. However, that is not across the board. A major exception is the automotive industry supply chain.

There are few industries as complex as automotive regarding supply chains. Normal supply and demand aren’t working here, even compared with other sectors that are recovering. Why? Let’s count the ways:

  • The pandemic
  • Semiconductor shortages
  • The war in Ukraine
  • Charging station availability
  • Evolving battery technology
  • Environmentally damaging mining for materials
  • Long-distance EV travel limitations
  • Expense of vehicles
  • Low available supply
  • A population plagued by inflation
  • An industry in design, development, and retooling transition

Each of the above added or is adding uncertainty to the industry. The reality is that the impact The ramifications of the slow-down in automotive sales during the early pandemic have been well understood. Auto manufacturers dropped their demand for semiconductors, which were promptly sold to others. Previously, these corporations relied on “just-in-time” inventory (JIT). Today, based on three years of chaos, the benefits of JIT are now liabilities.

There’s now a shift to “just-in-case” inventory (JIC)­. JIC relies on multiple manufacturing sources and relocating manufacturing closer to end markets and requires planning ahead for various scenarios in case of unexpected production, transport, and storage disruptions. There’s a downside. Should the chaos ebb, the company is stuck with JIC’s higher costs. As a result, both JIT and JIC will likely coexist as supply chains continue to evolve.

On the plus side for the industry, government involvement to bolster EV adoption has come in the form of infrastructure, jobs, and tax credits. 2021 saw a $1.2 trillion Infrastructure Investment and Jobs Act, including $7.5 billion for EV charging stations accessible to the public to try to offset short-range operation fears as a barrier to EV purchase. The Inflation Reduction Act just passed, including a $7,500 EV tax credit for buyers, and used car buyers will qualify for a credit up to $4,000. This bill is designed to help the automotive industry by bringing down the expense of EVs so that more people will buy them and also to freeze China out of the supply chain as the tax credits involve only domestic vehicles. It also establishes that by 2024, a minimum of 50% of the components in an EV battery must come from the U.S., Canada, or Mexico, reaching 100% by 2028. The legislation also provides billions of dollars to build factories, establish local supply chains, and help make EVs cheaper than gasoline and diesel vehicles.

The reaction to the legislation is mixed, with some saying it will take five years to revamp their supply chains enough for their vehicles to qualify for tax credits. And, when you consider the thousands of parts that are in a vehicle to be transitioned, you’re virtually shifting over the entire production base of the industry.

According to the Center for Automotive Research, fewer than half of all autos made in North America will be gas-fueled by 2029. In 2021, approximately 1.4 million EVs were built in the U.S. Non-hybrid EV production hit 50,000 and is expected to be 1.3 million in 2023. Estimates are that less than half of auto production in 2029 will be based on internal combustion engine vehicles.

Just one more wrinkle…

The introduction of EVs, growth of advanced driver-assistance systems (ADAS), and continued shortage of semiconductors and components have companies ordering between 10 to 20 percent more than they need to maintain inventory and safeguard production. In 2022, suppliers will order enough automotive chips for approximately 120 million new cars, while annual sales for the year are expected to be 83 million. However, this over-ordering doesn’t help. Because of the long production lead times for chips, there is even greater uncertainty in the semiconductor supply chain.

After everything else, China is now dealing with the worst heat wave in 60 years, as temperatures in several locations are more than 100°F. What impact could that make on the auto industry?

According to a Fortune article, China just ran into something that could be even more devastating for its supply chains than COVID-19 lockdowns: A record heat wave (August 20, 2022), in drought-stricken Sichuan, water levels at hydropower reservoirs were cut in half this month. Hydropower supplies approximately 80% of the local energy needs. Factories in 19 cities and prefectures are closing for five days to reserve electricity. Thousands of factories making processor chips and auto components in Sichuan and Chongqing shut down for at least six days. Tesla Ltd and a Chinese automaker suspended production.

Solutions will be gradual

While the market is rapidly evolving to develop additional and less-expensive vehicles to meet the burgeoning demand, if lead times on existing components are already breaking the industry, what will added capabilities do? It takes over three years to build a new fab, ramp up wafer production, and even put new manufacturing equipment in place, making expansion even more difficult.