The global auto industry just can't catch a break: automobile wire harnesses made on picnic tables because of a war in Ukraine, semiconductor plants halting production from an earthquake in Japan and backed-up ports in China amid rising COVID-19 cases are straining vehicle supply chains — again.
Forecasters expect millions of vehicles will be cut from production schedules this year and next as these events keep pushing automaker procurement departments, more than two years on, to work overtime navigating the bottlenecks. And that may be forcing automakers to rethink the just-in-time delivery model they've relied on to keep costs low.
"We’re looking for ways to move bearings, stampings, some wire harnesses," said Mark Wakefield, global co-leader of the automotive and industrial practice at AlixPartners LLP consulting firm. "So it’s not massive components that are being held up, but it is a problem. The unfortunate reality is it's not the first supply crisis we’ve had in the past two years."
S&P Global Inc.'s mobility team last week downgraded its 2022 and 2023 global light vehicle production forecast by 2.6 million vehicles for both years to 81.6 million and 88.5 million, respectively. Worst case could be a hit of as many as 4 million vehicles, said Mark Fulthorpe, the team's executive director for global production forecasting.
A big portion of that comes from halted vehicle production in Russia and Ukraine and increased risks for work stoppages because of semiconductor constraints, Fulthorpe said. Also factoring into the drop is decreasing demand as customers face inflation, including increasing costs from gas and energy prices.
"Many people if they've managed to remain in employment since the COVID crisis broke, typically they've saved quite a bit of money on travel, leisure spend that was seen as potentially a great enabler for pent-up demand to be released as we go forward," Fulthorpe said. "Now, we're thinking that that is a much more moderate effect, that some of the future demand will have been destroyed."
Some buyers who don't need to be in the market may wait. Others may look to electric or hybrid vehicles, though their capacity remains limited as automakers ramp up offerings. Shoppers may look to more fuel-efficient vehicles.
"If a customer buys the F-150 because they need the payload," said Dave Andrea, a principal and automotive strategist at Plante Moran, "but they can get 80% of the towing that they need with a smaller engine, the customer may buy a more fuel-efficient trim level."
European production
Wire harnesses were among the first components to feel the impact of the conflict in eastern Europe. Half of Ukrainian auto suppliers who have invested in the country since the late '90s produce wire harnesses, and it's the No. 10 producer for them in the world with 3.4% of global sales, according to AlixPartners.
Plants owned by BMW AG and Volkswagen AG have faced downtime due to parts shortages, leading BMW to cut its margin forecast and VW CEO Herbert Diess to warn the disruptions could risk the company's annual outlook. In its annual report, Daimler AG's Mercedes-Benz warned strong pricing "will not fully offset rising raw-material prices."
Downtime at a VW plant in Poland also has halted temporarily Ford Motor Co.'s Tourneo Connect compact van built there in a partnership, and the automaker is monitoring the situation, John Gardiner, spokesman for Ford of Europe, said in a statement.
Elsewhere, Ford has halted production at its plants in Saarlouis and Cologne in Germany. A Ford supplier also has said it cannot supply the parts for a 13.2-inch SYNC4 infotainment screen for the updated Focus in Europe. Production of the vehicle with the eight-inch screen continues.
"Supply of these parts are being moved to a new location in Europe but until this is up and running, the 13.2-inch screen with SYNC4 will not be available to customers," Gardiner said. "We apologize to customers for the inconvenience that this will cause but trust they will understand the exceptional circumstances."
Wire harnesses, in particular, are a challenge because they require a high labor content and often months of training, Fulthorpe said. Some automakers are looking elsewhere for the part, such as other eastern European countries or Mexico. Some have gotten more creative for now, Wakefield said.
"Some are insourcing," Wakefield said. "They are going to Germany or Italy in rare cases. It's a temporary thing. They'll have picnic tables with a testing device and a bunch of people twisting wires and testing the electrical connections on them for the short term."
Some automakers like Stellantis NV have found they've been better protected. CEO Carlos Tavares has said the automaker sources more of its components like wire harnesses from northern Africa rather than eastern Europe like its German rivals.
In a note last Tuesday, analysts with Morgan Stanley suggested automakers may have to rework supply chains designed for global, just-in-time delivery: "We believe the Russia-Ukraine conflict has the potential to accelerate a number of structural changes in the global auto industry."
That would increase insurance costs and wrap up automakers' capital in stockpiling certain parts rather than investing it in their products, creating a "new order of globalization," Andrea said.
"All of that has to be looked at in terms of how long these supply chains are," he said. "You have to start looking at risk and reward: whether the risk of lengthening that supply chain is too much, if it’s not to the benefit of putting that close by."
Semiconductors
Most pressingly, a 7.3-magnitude earthquake last Wednesday in Japan halted production at a number of semiconductor fabrication plants. The part is needed in vehicles from automated driving functions and infotainment to heated seats and emissions controls.
Renesas Electronics Corp., a key maker that experienced a fire at one of its plants last year that affected semiconductor access, initially idled production at three plants in response to the earthquake but started resuming lines last week. All three were expected to return to pre-earthquake operations by Wednesday.
An outcome of Russian steel production, Ukraine is the largest exporter of neon — half of whose global consumption goes to helium-neon lasers, according to AlixPartners. They're used to etch circuit patterns onto wafers of silicon in semiconductor production, a process called lithography.
That means semiconductors could be facing another capacity challenge in the future, especially if the conflict in Ukraine is prolonged. For now, chip fabricators don't expect disruptions in the near-term. A conflict between Ukraine and Crimea in 2014 taught them to rely less on neon, diversify sourcing and build safety stocks of up to six months.
"If the risk was to emerge, it will probably be in the second half of this year, and then possibly into the first half of 2023," Fulthorpe said. "At the moment, it's not an enormous risk, but it's certainly something that we should not ignore."
Palladium also is used in the production of semiconductors, and nearly a quarter of it comes from Russia.
Nickel for EVs
Russia is the third-largest producer of nickel behind Indonesia and the Philippines. Russia represents 10% of global nickel production, but it's the largest for mining production battery-grade nickel globally and No. 2 for its refined production after China, according to AlixPartners.
Nickel is an important element for electric-vehicle batteries. Although some automakers are moving away from using the expensive mineral, it continues to remain critical for the ramp-up of EV production.
A short squeeze pushed the price of nickel to more than $100,000 per ton earlier this month. It's now around $43,000 per ton, higher than historical averages.
"Right now, it’s a price issue," Wakefield said. "If supply curtails from Russia, it’s a huge issue. Nickel is already a tight metal."
The best-case scenario, he said, would be if China starts buying more nickel from Russia while western nations have sanctions in place, opening more supply for them from places like Australia, Canada and Indonesia.
But increasing costs of raw materials and logistics already have gotten to some EV makers. Tesla Inc. recently raised prices in the U.S. and China, and Rivian Automotive Inc. increased the price on reservations for its electric vehicles only to reverse the decision following an uproar from customers. Lucid Group Inc. CEO Pater Rawlinson told Reuters last week that it was an "inevitability" the California-based startup would have to look at price hikes.
"Ten to 15% of the cost (for an EV battery) was in the nickel," Wakefield said. "Now, it’s another $1,000 to $2,000 for a battery. That’s a real impact."
As General Motors Co. on Monday launched production of the Cadillac Lyriq EV, the automaker said for now it's maintaining its 2022 financial outlook, which includes $13 billion to $15 billion in operating profit following a record $14.3 billion for 2021.
The best-case scenario, he said, would be if China starts buying more nickel from Russia while western nations have sanctions in place, opening more supply for them from places like Australia, Canada and Indonesia.
But increasing costs of raw materials and logistics already have gotten to some EV makers. Tesla Inc. recently raised prices in the U.S. and China, and Rivian Automotive Inc. increased the price on reservations for its electric vehicles only to reverse the decision following an uproar from customers. Lucid Group Inc. CEO Pater Rawlinson told Reuters last week that it was an "inevitability" the California-based startup would have to look at price hikes.
"Ten to 15% of the cost (for an EV battery) was in the nickel," Wakefield said. "Now, it’s another $1,000 to $2,000 for a battery. That’s a real impact."
As General Motors Co. on Monday launched production of the Cadillac Lyriq EV, the automaker said for now it's maintaining its 2022 financial outlook, which includes $13 billion to $15 billion in operating profit following a record $14.3 billion for 2021.
China outbreak
Meanwhile, China is grappling with the country’s largest outbreak since the pandemic began in Wuhan more than two years ago because of a new version of the quickly spreading, but less severe, omicron variant. The country recently reimposed lockdowns in a number of cities. Efforts to prevent the spread led to downtime for two days last week at Tesla's Shanghai plant and experts have warned of shipping delays from backed-up ports.
"It looks worse than last year when they shut down the power and had that magnesium problem," Wakefield said.
Adding to the potential stressors is the Biden administration threatening to respond if Beijing decides to give material aid to Russia to support its war in Ukraine. GM's Reuss emphasized the advantages of a global, redundant supply chain.
"It's not just people that only supply in China," he said, "but the global suppliers that are in China, North America and other places, and so we leverage that global footprint. We never have just one answer on those things."
