How automakers rethink supply models amid wars, epidemics and earthquakes

The global auto industry can’t break: Auto wires made on picnic tables because of the war in Ukraine, semiconductor factories halt production from an earthquake in Japan and subsidized ports in China amid rising COVID-19 cases are straining vehicle supply chains — again.

Forecasters expect millions of vehicles to be cut from production schedules this year and next as these events continue to push automakers’ purchasing departments, for more than two years, to work overtime to beat bottlenecks. That may force automakers to rethink the just-in-time model they have relied on to keep costs down.

“We’re looking at ways to move the bearings, the seal, and some wires,” said Mark Wakefield, global co-head of the automotive and industrial practices sector at consultancy AlixPartners LLP. “So bulky components aren’t disabled, but it’s a problem. The unfortunate truth is that it’s not the first supply crisis we’ve had in the past two years.”

S&P Global Inc.’s Mobility Team cut back. Last week its forecast for global production of light vehicles for 2022 and 2023 increased by 2.6 million vehicles for both years to 81.6 million and 88.5 million, respectively. The worst case could be a blow to up to 4 million cars, said Mark Folthorpe, executive director of the team’s global production forecasting team.

A large part of that comes from car production halts in Russia and Ukraine and increased business disruption risks due to semiconductor restrictions, Folthorpe said. Taking the decline into account also leads to lower demand as customers face inflation, including increased costs from gas and energy prices.

“If many people have been able to stay in their jobs since the outbreak of the coronavirus crisis, they usually save quite a bit of money on travel and leisure spending that was seen as a huge enabler to unleash pent-up demand now, we believe that this a milder effect, and that some future demand will be destroyed.”

He may wait for some buyers who do not need to be in the market. Others may be looking to electric or hybrid cars, although capacity remains limited as automakers ramp up offerings. Shoppers may be looking for more fuel-efficient cars.

“If a customer buys an F-150 because they need the payload, but can get 80% of the towing they need with a smaller engine, they can buy a more fuel-efficient trim level,” said Dave Andrea, principal and automotive strategist at Plante Moran.

European production

Metal wires were among the first components to feel the impact of the conflict in Eastern Europe. Half of Ukrainian auto suppliers that have invested in the country since the late 1990s produce wire harnesses, which is their 10th product in the world with 3.4% of global sales, according to AlixPartners.

Factories owned by BMW AG and Volkswagen AG faced disruption due to a lack of parts, prompting BMW to cut margin forecasts, and Volkswagen CEO Herbert Diess warning that the disruptions could threaten the company’s annual outlook. In its annual report, Daimler AG’s Mercedes-Benz warned that strong prices “will not fully offset higher raw material prices”.

The stop at Volkswagen’s plant in Poland has paused Ford Motor Company’s Torneo Connect compact car built there in partnership, John Gardiner, a spokesman for Ford Europe, said in a statement, and the automaker is monitoring the situation.

Elsewhere, Ford halted production at its factories in Saar-Louis and Cologne in Germany. A Ford supplier also said it could not provide SYNC4 13.2-inch infotainment screen parts for the updated Focus system in Europe. Production of the eight-inch screen car continues.

“The supply of these parts is being moved to a new location in Europe, but until this is operational, the 13.2-inch screen with SYNC4 will not be available to customers,” Gardiner said. “We apologize to customers for the inconvenience this may cause, but we trust that they will understand the exceptional circumstances.”

Wire harnesses, in particular, are challenging because they require a great deal of labor and often months of training, Folthorpe said. Some car manufacturers look elsewhere for this part, such as other Eastern European countries or Mexico. Some are getting more creative right now, Wakefield said.

“Some are outsourcing,” Wakefield said. “They rarely go to Germany or Italy. It’s temporary. They’ll have picnic tables with a tester and a bunch of people winding wires and testing electrical connections on them in the short term.”

Some car manufacturers such as Stellantis NV have discovered that they have better protection. CEO Carlos Tavares said the automaker is sourcing more of its components such as wires from North Africa rather than eastern Europe like its German competitors.

In a note last Tuesday, analysts at Morgan Stanley suggested that automakers may have to rework supply chains designed for global delivery in time: “We believe that the conflict between Russia and Ukraine has the potential to accelerate a number of structural changes in the global auto industry.”

That would raise insurance costs and wind up capital for automakers hoarding certain parts rather than investing them in their products, Andrea said, creating “a new system of globalization.”

“It all has to be looked at in terms of the length of these supply chains,” he said. “You have to start looking at the risks and rewards: whether the risks of extending this supply chain are too great, if it’s not in the interest of putting that close to you.”

Semiconductors

More urgently, the 7.3-magnitude earthquake that struck Japan last Wednesday halted production at a number of semiconductor manufacturing plants. This part is required on vehicles from automated driving and infotainment functions to heated seats and emissions controls.

Renesas Electronics Corp. , a major maker that suffered a fire at one of its plants last year that affected access to semiconductors, initially disrupted production at three plants in response to the quake but began restarting production lines last week. The three are expected to return to pre-quake operations by Wednesday.

As a result of Russian steel production, Ukraine is the largest exporter of neon — half of its global consumption goes to helium-neon lasers, according to AlixPartners. They are used to etch circuit patterns on silicon wafers in semiconductor production, a process called lithography.

This means that semiconductors may face another capacity challenge in the future, especially if the conflict in Ukraine drags on. For now, chip makers do not expect disruptions in the near term. A conflict between Ukraine and Crimea in 2014 taught them to rely less on neon, diversify sources and build safe stocks for up to six months.

“If the danger does emerge, it will likely be in the second half of this year, and then possibly in the first half of 2023,” Folthorpe said. “For now, this isn’t a huge risk, but it’s definitely something we shouldn’t ignore.”

Palladium is also used in semiconductor production, about a quarter of which comes from Russia.

Nickel for electric vehicles

Russia is the third largest producer of nickel after Indonesia and the Philippines. Russia accounts for 10% of global nickel production, but is the largest producer of battery-grade nickel globally and second in its refined production after China, according to AlixPartners.

Nickel is an important component of electric vehicle batteries. Although some car manufacturers are moving away from using the expensive metal, it is still important for increasing production of electric cars.

A short squeeze pushed the nickel price over $100,000 a ton earlier this month. It’s now about $43,000 a ton, which is above historical averages.

“Right now, it’s a price issue,” Wakefield said. “If the supply from Russia shrinks, that’s a big problem. Nickel is a really tight metal.”

The best-case scenario, he said, would be if China starts buying more nickel from Russia while Western countries have sanctions in place, opening up more supplies for it from places like Australia, Canada and Indonesia.

But increased costs for raw materials and logistics have already taken its toll on some electric car makers. Tesla Inc. raised. Recently, prices in the United States and China, and Rivian Automotive Inc. The price of reservations for its electric cars only to reverse the decision after an uproar from customers. Peter Rawlinson, CEO of Lucid Group Inc. , told Reuters last week that the California-based startup should consider price hikes “inevitable”.

“10 to 15% of the cost (for an electric car battery) was in nickel,” Wakefield said. “Now, there’s $1,000 to $2,000 for another battery. And that’s a real impact.”

With General Motors on Monday launching production of the Cadillac Lyriq EV, the automaker said for now it is maintaining its financial forecast for 2022, which includes $13 billion to $15 billion in operating profit after $14.3 billion in 2021.

The best-case scenario, he said, would be if China starts buying more nickel from Russia while Western countries have sanctions in place, opening up more supplies for it from places like Australia, Canada and Indonesia.

But increased costs for raw materials and logistics have already taken its toll on some electric car makers. Tesla Inc. raised. Recently, prices in the United States and China, and Rivian Automotive Inc. The price of reservations for its electric cars only to reverse the decision after an uproar from customers. Peter Rawlinson, CEO of Lucid Group Inc. , told Reuters last week that the California-based startup should consider price hikes “inevitable”.

“10 to 15% of the cost (for an electric car battery) was in nickel,” Wakefield said. “Now, there’s $1,000 to $2,000 for another battery. And that’s a real impact.”

With General Motors on Monday launching production of the Cadillac Lyriq EV, the automaker said for now it is maintaining its financial forecast for 2022, which includes $13 billion to $15 billion in operating profit after $14.3 billion in 2021.

China outbreak

Meanwhile, China is grappling with the country’s largest outbreak since the epidemic began in Wuhan more than two years ago due to a new version of the rapidly spreading, but less severe, omicron variant. The country recently reimposed lockdowns in a number of cities. Efforts to prevent the spread led to a two-day layoff last week at Tesla’s Shanghai plant and experts warned of delays in shipping from supported ports.

“It looks worse than last year when they turned off the electricity and they had a magnesium problem,” Wakefield said.

Adding to the potential pressures, the Biden administration threatens to retaliate if Beijing decides to provide material assistance to Russia to support its war in Ukraine. GM’s Reuss emphasized the advantages of a redundant global supply chain.

He said, “It’s not just people who supply China, but global suppliers that are in China, North America and elsewhere, and so we’re taking advantage of this global footprint. We don’t have just one answer for these things.”

(Authors Kalia Hall and Jordyn Grzelowski contributed from the Detroit News Team.)

© 2022 www.detroitnews.com. Distributed by Tribune Content Agency, LLC.

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