Production downtime continues to plague the industry as a return to normalcy in the supply chain may not occur until 2023. Sales remain depressed as total inventory moved below one million units last month.
In this issue, A&M analyzes the transportation and logistics issues contributing to supply chain turmoil as the selected topic for the October Industry Focus.
In the transaction market, Volvo will conduct an IPO on the Stockholm exchange in October at a valuation up to $23 billion in support of its electrification push. Global automakers are forming partnerships in an effort to bolster their electric vehicle material and part supply.
Detroit Three automakers are implementing vaccine mandates for all employees at Canadian facilities. Additionally, GM reached an agreement with LG for the battery supplier to pay the majority of costs related to Chevy Bolt fires and the associated recall.
Additional October insights are included below.
Financial Performance
The latest Auto Forecast Solutions’ (AFS) numbers show that shutdowns and delays have already resulted in 9.6 million lost vehicles and AFS now estimates approximately 10.8 million total cars and trucks will be affected by chip-related supply disruptions. In the past week alone, automakers reduced global production by an additional 280,000.
Examining the cuts further shows that North American automakers accounted for approximately 80,000 vehicles, with GM and Toyota responsible for the overwhelming majority of these cuts. North American automakers had lowered planned production by less than 10,000 units each of the prior two weeks, but the latest developments are a setback to the positive movement. Additional vehicles are expected to be cut from planned production in North America in the coming months, but domestic automakers anticipate improvements in 2022 and hope for a return to normalcy in 2023.
Industry Update
Automotive inventory decreased by 94,000 units in September, resulting in approximately 970,000 total units. This is the eighth consecutive month of an absolute decline in inventory and translates to a days’ supply (DS) 66 percent below the five-year average at 19 DS. Inventory has been cut in half in the past six months as April inventory was at approximately 2 million units. Additionally, the monthly pace of inventory decline actually accelerated despite the continued deceleration in sales. The 12.2 million seasonally adjusted annualized rate (SAAR) of sales in September is a 25 percent year-over-year decrease as inventory weighs on performance.
Production is expected to remain volatile into 2022 primarily due to the COVID resurgences and shutdowns in Malaysia and Southeast Asia, two key locations in the semiconductor supply chain. IHS expects the third quarter of 2021 to be affected by the shortages even more than the second quarter, and the fourth quarter of 2021 is similarly exposed. IHS anticipates supply chain issues to persist into 2022 with the earliest return to stabilization being the second quarter of the upcoming year, but the timeline for inventory recovery continues to extend as additional disruption hits the industry.
Industry Focus – Transportation and Logistics
In this issue, A&M is focusing on transportation and logistics issues in the automotive supply chain and how they will continue to affect the industry.
When the COVID-19 pandemic began, demand fell as global economies went into a lockdown before entering into the attempted resurgence in mid-2020. Restarting the supply chain was a challenge as moving products globally required predictability and accuracy that was not present at the time. Transportation and logistics issues continue to strain the globe and automotive industry as the automakers struggle to maintain enough inventory to meet demand. Industry players are dealing with longer lead times, lower part and material supply, and higher costs on account of issues with transportation.
According to the World Trade Organization, the United States accounted for more than 20 percent of automotive products imported in 2020 across the globe for a total import value of $260 billion. Considering the additional $110 billion of automotive products exported from the U.S. in 2020, disruptions to the global transportation have significant adverse effects on domestic industry performance. In the below sections, A&M describes a variety of supply chain issues and their ongoing effect on the automotive industry.
Port Congestion and Delays: Ports have been overwhelmed due to increased demand for cargo and shipments. The busiest domestic port for trade with Asia, the Port of Los Angeles, finished the latest fiscal year in June 2021 with a port record of 10.9 million cargo units passing through; this represents a 12 percent increase from 2019 traffic and a 27 percent increase from 2020. According to the executive director of the Port of Los Angeles, shipping vessels are sitting idle approximately 2.5 times longer than before COVID; ports at Los Angeles and Long Beach recently faced more than 60 vessels at anchor, a record number.
Severe weather has also played a role in port interruptions worldwide. Ports in Louisiana and Mississippi faced closures due to hurricane Ida. One of the world’s busiest ports, the Yantian Port in China, has faced multiple disruptions due to tropical storms, and more are expected to occur throughout the year.
Raised Shipping and Container Rates: Shipping containers are critical to global trade and have come in short supply after COVID-19 brought lockdowns and volatility. The shortage is the result of a rise in idle containers as many remain empty and out of circulation due to their location outside of the most profitable shipping routes. The increase in demand after COVID lockdowns eased, coupled with lower container turnover, caused prices to skyrocket. According to Forbes, the latest numbers show an average price for a standard 40-foot container of $6,000, which is more than double the 2016 price. In some situations, cargo owners find themselves paying up to $20,000 or $25,000 per container, whereas the pre-pandemic prices of the same shipping containers ranged from $1,500 to $2,000.
Approximately 90 percent of world trade involves overseas shipping, the costs of which have also increased due to a shortage in supply. The Suez Canal blockage, port backlogs and stranded containers caused an additional need for more ships to work around these issues. Additional ships are not likely to be available until 2023. Certain routes have such an increased cost that carriers are willing to leave U.S. ports with empty containers to avoid wait times, which has further reduced domestic container circulation.
Trucking Labor Shortage: Once a container is unloaded at a port, trucking is the primary mode of transport. With a backlog of shipping containers at ports, demand for trucking services is high to increase the flow of goods. Unfortunately, a shortage of truck drivers has left approximately one driver for every nine job postings from driver recruiting firms, according to Forbes.
Given that trucking is critical to relieving congestion at ports, rail depots, and other parts of the supply chain, increasing the supply of truck drivers is a priority for the supply chain. Despite rapidly rising wages being offered, drivers who exited the industry due to lifestyle complaints, increased unemployment benefits, and grueling hours are still not being lured back into the industry at a sufficient rate.
Rail Delays: Rail yards are facing congestion of their own to contribute the transport issues. According to Bloomberg, the average dwell time for containers across eleven major railroad depots reached 9.8 days as of the end of September. This metric is up from 5.9 days in February and 6.7 days in May. Chicago is a prime distribution hub by rail and is currently a severe bottleneck as all seven of the major North American railroads converge to the location. Some transportation and logistics companies are trying to divert to other Midwestern locations, but this is costly and other forms of transport across the country are not feasible. In addition, railroads are facing a labor shortage as furloughed workers during the pandemic have been slow to return to work.
Automotive Outlook: The transportation and logistics problems described above are complex and connected to one another. There is no resolution in sight as a lack of clarity and delays compound at each step of the supply chain. In the September Automotive Spotlight, A&M highlighted the shortage in raw materials, which have undoubtedly been affected by the supply chain issues. Dwindling industry inventory and ongoing production stoppages as a result of shortages and transportation issues are unlikely to be resolved in the near-term, and automakers must continue to work around yet another issue plaguing the industry.
Transaction Activity
After recent rumors of a public offering, Volvo announced it intends to file for an IPO on the Stockholm stock exchange with shares expected to begin trading on October 28. The offering will raise approximately $2.9 billion for the automaker with a target valuation of approximately $23 billion in what will be Europe’s largest IPO since January. Funds raised in the share sale will be used for the automaker’s transition to electric vehicles as Volvo plans to only sell electric vehicles by 2030.
See below for additional detail on recently announced transactions.
- Stellantis and battery maker LG Energy have agreed to form a joint venture to produce battery cells and modules beginning in 2024. The batteries will be supplied to Stellantis’ North American plants as the company plans to electrify its vehicle lineup with a $35 billion investment plan through 2025.
- GM is partnering with the renewable energy division of General Electric to develop a supply chain of materials used in electric vehicles and renewable energy equipment. The supply chain will be based in North America and Europe with the goal of supplying light and rare Earth materials, magnets, copper, and electric steel.
- Semiconductor and wireless technology company Qualcomm has reached an agreement to purchase automotive technology company Veoneer, trumping a prior bid from Magna. With the acquisition, Qualcomm enhances its ability to provide an advanced driver-assistance system.
- Electric vehicle startup Lordstown Motors is partnering with technology company Foxconn in an effort to improve the startup’s large-scale production capabilities. Lordstown Motors will sell its Ohio factory to Foxconn for $280 million as part of the deal while also receiving an equity investment.
Regulatory Landscape
Electric Vehicle Tax Credit: Over 100 U.S. House lawmakers urged U.S. House Speaker Nancy Pelosi to support the $4,500 tax credit for union-made electric vehicles that may be included in the $3.5 trillion spending bill. Companies without union employees, such as foreign automakers and Tesla, are against the proposal and feel it puts non-union employees at an unfair disadvantage.
Vaccine Mandate in Canada: The Detroit Three automakers of Stellantis, Ford, and General Motors will require all employees at Canadian facilities to be fully vaccinated against COVID beginning later this year. Union leaders have voiced support for the mandate, citing that the vast majority of unionized employees are vaccinated and have additional comfort working alongside other vaccinated people.
Tesla Autopilot: After the National Highway Traffic Safety Administration (NHTSA) opened an investigation into Tesla’s Autopilot due to repeated collisions, the automaker made an over-the-air update of its Autopilot software without instituting a formal recall. After the decision, the NHTSA requested information from Tesla related to the software update, prior crashes, and whether Tesla intends to file a safety recall; the NHTSA has the authority to force a recall if they deem Autopilot defective.
Chevy Bolt fires: After recalling more than 140,000 Chevy Bolts due to fire risks stemming from a battery manufacturing defect, GM reached an agreement with battery supplier LG to recover $1.9 billion of the $2 billion total estimated cost of the recall. By paying the vast majority of costs, LG has assumed responsibility of the recall and will continue to partner with GM for the production of future batteries.
Stay connected to industry financial indicators and check back in November for the latest Auto Industry Spotlight.