Fixing the Global Automotive Supply Chain

The automotive industry is global, and COVID has disrupted the entire globe.

The Post-COVID Landscape Looks More Like a Mid-COVID Landscape

There’s no question that COVID-19 has changed the way all of us have been living over the last two years. We have weathered the great toilet paper shortage, shutdowns of many of our favorite gathering places, and at times even the outside world. The most disappointing nontechnical supply story that I’ve heard in the last few months revolves around a potato shortage, where farmers had to throw away much of their yield in 2020 and are now scrambling to find workers.

Modern life has become more and more efficient and just-in-time as we want everything to be delivered to us right away and we want it cheap. Pandemic shipping shortages have highlighted how interconnected everything is. When restaurants were closed during the pandemic, people started to cook more at home, and supplies at groceries stores were lessened. People at home were bored and ordered more products from giant online retailers, so shipping costs shifted and the timeliness of deliveries came into question. Cataclysmic weather events pop up every few weeks and disrupt shipping even more. Shipping containers even became scarce as more and more things needed to be shipped—my hypothesis that too many people bought shipping containers to build tiny houses has been shot down several times.

Ports are struggling to keep up with shipping volumes.  (Image courtesy of Creative Commons.)

Ports are struggling to keep up with shipping volumes. (Image courtesy of Creative Commons.)

President Biden called for 100-Day Reviews using Executive Order 14017 and that report, titled Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth, was published in June 2021. Some of the highlights of the report include the idea that supply chains are critical for our national security, economic security and technical leadership. Among the most critical supply chains listed in the report are critical minerals and materials, large capacity batteries, and semiconductor manufacturing and advanced packaging. Coincidentally, all of these supply chains are connected to the automotive industry.

Automotive Industry Supply Chain Disrupted on Many Fronts

Pete Tantillo from Supply Chain Brain summarized his frustrations while trying to buy a Ford Bronco earlier this year. The dealer was not even able to estimate a date when the car would arrive, and the dealership also knew that it was scheduled to receive only one-half to one-third of the vehicles it had on order in 2021. Many orders in the system were converted to the next model year, and I’m assuming that many other orders were canceled. It takes tens of thousands of components and part numbers to make an automobile. There are likely thousands of supply chain stories happening at any given time, but just as the White House report points out, the semiconductors are getting blamed for much of the auto industry’s problems.

Microchips are in short supply all over the world.  (Image courtesy of Wikimedia Commons.)

Microchips are in short supply all over the world. (Image courtesy of Wikimedia Commons.)

Microchips are in high demand with low supply. The New York Times said that one vehicle can contain up to 100 chips, and as our cars get more complex, the computers will need more and more chips to keep our new features powered and functional. Vanessa Miller from Foley & Lardner LLP says that the semiconductor issue is compounded by the fact that it’s not just automotive companies begging for material to make microchips. Every phone, television, satellite and smart doorbell needs the microchips, and automotive customers comprise only 2 to 3 percent of total global demand.

Bill Conerly from Forbes blames some of this chip shortage on the auto companies, as participants in their own slowdown. When the pandemic and shutdowns hit, he says, automakers expected a recession and reacted quickly by cutting orders to many suppliers. A supplier that only makes automotive components is then stuck waiting for automotive demand to pick back up. But a supplier that is making parts in unprecedented high demand during a pandemic has plenty of other options to sell their product. Conerly notes that the cost of chips in a car hovers around $400, while the average vehicle costs a little over $40,000, so 1 percent of the assembly cost is stifling the production of the rest of the system.

More Finger Pointing, but Some Progress

Sam Shead from CNBC recently published an interview with Bosch where the automotive components supplier noted that the semiconductor supply chain might no longer be viable. Bosch built a $1.2 billion semiconductor plant in Dresden, Germany, over the last few years. Harald Kroeger, a board member from Bosch, said, “The fact that we actually started to build this plant a couple of years ago shows that we expected the demand to go up dramatically.” Shead says that Intel and TSMC are also planning to make new factories in the near future to address the need for semiconductors.

This might also be the right time for automakers to take a long difficult look in the mirror. Tom Roberts from Automotive News says that the general approach in the last decade has been to hold very little inventory on hand. This keeps costs down, and when a supply disruption comes, the car companies have chosen to “weather the storm” until the problem solves itself. Roberts says that each automaker needs to ask themselves these questions—are they going to hold inventory for key components, diversify their supplier base, increase order lead times, or invest in new processes and tools to manage the supply chain? These are all options that should lead to less disruption but also options that will cost a company time, money and resources. This is just one of many balancing acts that every manufacturer will struggle with over the next few years.

What Happens Now? And Next Year?

Everyone has opinions about the end of the global supply chain issues. And many people have data to back up those opinions. Garth Friesen from Forbes wrote an article titled No End In Sight For The COVID-Led Global Supply Chain Disruption, so his vote is clear. Friesen looks at the supply and demand bumps and dips from the pandemic but places the blame on rising shipping costs and rising shipping container costs. He quotes the average price for a Chinese-built shipping container at over $6,000—more than double the cost from 2016. That cost is due to demand but also to having many shipping containers out of circulation. When companies shipped hundreds of thousands of masks to Africa and Asia, those shipping containers might not have had retrieval priority. The Suez Canal blockage also saw many containers going to alternate ports, lost in litigation or somehow still sitting in port waiting to be unloaded. Friesen also calls out rising shipping costs, ports struggling to meet demand, a shortage of workers in the trucking industry, and warehouse capacity as signs that we are stuck in the supply chain disruption zone for a year or two.

On the bright side, Jatco CEO Teruaki Nakatsuka was quoted in a Stansberry Investor article with an eye on the end. Nakatsuka said that he expects global auto production to ramp up between now and March 2022, with semiconductors still being an issue. Further, Taiwan has boosted its semiconductor production and expects to make even more in the coming months. This is seen as a promising sign because Taiwan manufactured more than 60 percent of semiconductors in 2020.

This feels like the time for the car companies to make some big changes. General Motors has had perhaps the most visible set of plant shutdowns and publicly placed the blame not on the global supply chain issues but on microchips in general. On the macro scale, there are some indicators that chip production may be increasing and that some relief could happen in the next year. But on a micro level, speaking about the assembly plant shutdowns, GM Spokesman Dan Flores said, “What we announced this morning is what we know now. I can’t speculate if something will be announced next week or if there’ll be additional impacts. We manage this on a day-to-day basis.” That doesn’t sound like a comfortable way to do business.