This Week in Engineering explores the latest innovations and tech trends in engineering from academia, government and industry.
Episode Summary:
With the combination of Covid 19 related supply chain disruptions and a major fire at a critical supplier, Ford Motor Company is reporting that the shortage of semiconductors will result in 50% production setback in the second quarter. To compensate, the company is moving to an online sales model with lower dealer inventory levels.
The heavy equipment industry is an important leading indicator for overall economic health, and a new survey of senior management in the off-the-road sector shows high levels of optimism for 2021, especially if the Biden Administration follows through on infrastructure spending plans.
And industry heavyweight ABB has commissioned a report on electric vehicle battery supply chains that suggests a global arms race is developing between Asia, Europe and America. The winner may determine the future of global automobile production.
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Transcript of this week’s show:
Covid 19 related supply chain issues are affecting manufacturing everywhere, but nowhere as seriously as the automotive industry. Ford has released first-quarter results, and the global semiconductor shortage is a significant factor in production rates. The part shortages are not only slowing production, they’re backing up the rest of the supply chain, adding to inventories and work in process. Despite strong earnings, Ford’s adjusted free cash flow is in the first quarter was $-396 million, primarily due to semiconductor-related supply issues. Ford noted that a fire at a Japanese supplier plant in March was an additional factor in the chip shortage. The shortage comes at a time of increasing consumer demand, with recent new product launches of the Mustang Mach E SUV, the new Bronco, and the company’s cash cow redesigned F-150 pickup. With production disrupted, Ford is looking at different ways to minimize the impact, notably by changing the sales process. The company is promoting online vehicle sales in collaboration with dealers to maintain sales volumes with lower than normal dealer inventory levels. Both Mach-E and the new Bronco were available for order long before the first vehicles shipped, a trend popularized by Tesla, who maintain low vehicle inventory levels with their direct to consumer sales model. Ford estimated a 10 to 20% reduction in manufacturing volumes due to the semiconductor problem late last year, and now estimates the company will lose 50% of second quarter production due to the shortages. The company expects the problem to ease in the second half, but the financial hit has been significant: Ford states that the problem has the potential to reduce the company’s full year adjusted earnings before interest and taxes by between one and 2 ½ billion dollars. Expect Ford and other automakers to diversify their supply chains significantly post Covid.
While the auto industry is a major component of the American economy, the off-road equipment industry is the canary in the coal mine for future US economic performance. Major investors like Warren Buffett watch equipment manufacturers, because strong demand for construction, mining, forestry and agriculture equipment like tractors, cranes and bulldozers are real-time indicators of increasing economic activity. The US trade group for the industry, the Association of Equipment Manufacturers has released a comprehensive survey of market sentiment by corporate executives in the sector. Fully 88% of respondents expect a positive outlook for 2021, and 55% expect sales to increase or remain stable, despite the dual impact of Covid 19 and supply shortages of critical components like semiconductors and tires. Despite the optimism, reported sales figures show the impact of Covid. 19% report increased sales, while 36% indicate sales are stable. 45% however, report that sales are down, citing supply chain disruptions, delayed or cancelled state and local level infrastructure projects and lower international sales due to Covid -related travel restrictions. Interestingly, when asked to rank the biggest challenges for 2021, the expected top two, Covid 19 and labour shortages, were followed by regulatory challenges, tariffs and tax code changes and internal reorganization, with supply chain disruption ranking sixth on the list. Are equipment manufacturers less susceptible to supply chain issues than automakers? The survey suggests this, and industry executives’ responses about the impact of Covid 19 track those of other manufacturing industries. 80% feel that Covid 19 will have a permanent impact on the way we work. 45% reported productivity increases with remote work during Covid while 36% reported decreased productivity. And the predicted wave of retirements due to Covid 19? Only one in five declared that the pandemic has caused them to consider early retirement. With the ongoing manufacturing labour shortage, that’s probably a good thing.
Global heavyweight ABB’s Robotics and Discrete Automation business has commissioned a report from Ultimamedia on global electric vehicle battery supply chains and the results suggest that the automotive industry worldwide may be headed toward a major supply bottleneck in the future. According to the report, lithium-ion battery technology will remain the industry standard for the foreseeable future, with battery cost the primary factor in the rate of replacement of internal combustion engine vehicles with electric platforms. The $100 per kilowatt hour price estimate for vehicle cost parity with fossil fuel vehicles is attainable, but Covid -related supply chain issues are compounding existing problems with battery raw material supply and pricing, particularly lithium. Despite component shortages and input supply and price uncertainty, the report predicts 20% compound annual growth rates for global electric vehicle sales over the next 10 years. And with lithium-ion technology also supporting stationary power storage technology for the solar and wind power industries, production capacity will need to outstrip demand from the automotive industry worldwide. The report estimates that global capacity for lithium-ion batteries will increase from 450 GW hours in 2022, to more than 2850 GWh by 2030. With battery cost representing almost 1/3 of the manufacturing cost of an electric vehicle, getting this part of the supply chain right is make or break for automakers, and the industry is pursuing different tactics for sourcing the batteries. Tesla is using a vertical integration strategy, investing upstream as far as lithium mining, while developing in-house cell and battery pack manufacturing capability. Mainstream automakers however are using joint ventures and long-term supply agreements with existing and new battery makers to lock in supply. P23 The report notes that government incentives are not just a factor for consumers purchasing electric vehicles but are major drivers for the battery industry as well. The report estimates that a fully integrated European battery industry, from raw materials to recycling, would be worth up to $300 billion a year in economic activity, and create 4 million jobs. Asia leads the way in battery production, followed by Europe with America lagging as EV market acceptance lags other regions. 80 new plants are announced or are under construction, and battery manufacturing is predicted to become a 21st century arms race, with the winning region dominating auto production worldwide.