The COVID-19 pandemic is not over, but at a time when the economic recovery is strong in North America, shortages are limiting automotive production. Ducker Senior Engagement Manager, Bertrand Rakoto explores how the shortage of electronic components is creating a rather unusual situation as dealer lots are being emptied, TV ads no longer mention promotions, and rental companies are driving up their prices.
The shortfall is mainly in electronic components, but it also affects other component families, such as seat foams, which were affected by the March cold snap in the United States that brought the country to a standstill and deliveries still pending. Resins are also among the missing components, but it seems that the shortage is also a means of pressure to negotiate prices, the climate opens the way to such opportunities. Automakers are juggling between their various plants and trying to favor the vehicles with the highest demand and margins
Supply chain disruptions are multiplying, and forecasts are becoming more and more pessimistic. Mike Jackson, CEO of AutoNation, the largest dealership group in the U.S., says the shortage could continue into next year. Lately Infineon CEO, Reinhard Ploss, has declared the shortage could have effects until 2023, an outcome shared by Intel CEO, Patrick Gelsinger, who just invested 20 billion dollars in two locations to increase production. The additional production won’t be available until late next year. This makes the scenario of a postponed full recovery to 2023 very realistic. Momentum seems to be building in North America, but ecosystems and complete supply chains need time to ramp up and if supplies increase, it would be too short to seriously alleviate the current production situation. The Biden administration has announced an initial investment of $50 billion and the US congress currently works on a bipartisan bill that would push the investment to 52 billion dollars. For the time being, the situation is not improving. Production line stoppages are multiplying and the side effects on the automobile market are numerous.
The COVID-19 crisis is a formidable catalyst for anyone working in strategic intelligence. One by one, the value chains reveal their lack of anticipation to the growing demand in microchips and the dependency towards single sources or regionally concentrated productions. Initially, the staggered start of the COVID-19 epidemic showed the fragility of just-in-time production and the geographic concentrations of certain products. The persistence of supply disruptions highlights the problems linked to successive consolidations, and the automotive industry’s dependence on channels that it does not control. Above all, the margins held compared to those practiced in the IT world, and the legendary efficiency of purchasing give the automotive industry little strength to apply pressure and negotiate more volumes.
The increasing number of delays and the constant postponement of a potential return to a normal situation, not to mention catching up, tend to prove that there are serious capacity problems. Some of these problems are cyclical, since the health situation does not allow the plants to operate at full capacity, either because the employees are ill or because the populations are subject to partial confinement.
Other capacity problems are structural, as the case for electronic components. The surge in demand for electronic components has accelerated in various sectors such as electronic mobile devices or other personal IT items. The confinements have caused or accelerated some changes in consumption patterns. As lockdowns ended in some areas, the rapid increase in demand has thrown off the balance for several economic activities or industries. As an example, vehicle rental companies saw demand dropping to an all-time low in 2020, and demand have risen again in early 2021. The situation was sudden, and no-one was prepared. Hertz is in bankruptcy protection and most leasing companies shed their fleets last year. The market lows required to secure financial results, while the strong demand for new and late-model vehicles was peaking late last year in the U.S. this was the perfect opportunity. These financial decisions to scale down inventories came at the perfect moment as it helped salvage ailing accounts.
The survival movement of car rental companies emptying their parking lots has allowed them to avoid loans and debt, if not meet the same fate as Hertz. But as air traffic picks up in North America, rental companies are failing to meet the demand of business and vacation travelers.
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