More than 10 million vehicles have been cut from global production due to the semiconductor shortage. The latest inventory and sales numbers remain low, but the production low point may have passed, based on the latest signals.
In this issue, A&M examines the benefits of a flexible cost structure for automotive companies as the selected topic for the November Industry Focus.
In the transaction market, Rivianand Volvo both completed initial public offerings andVisa and DuPont are becoming more involved in automotive, based on the latest partnerships and acquisitions.
Additionally, President Biden has signed into law an infrastructure package which will accelerate the adoption of electric vehicles in the U.S.
Additional November insights are included below.
Financial Performance
The latest Auto Forecast Solutions’ (AFS) numbers show that shutdowns and delays have already resulted in 10.1 million lost vehicles, and AFS now estimates approximately 11.3 million total cars and trucks will be affected by chip-related supply disruptions. Automakers reduced global production by an additional 260,000 units in the past week, up from 34,000 units the week before, with North America accounting for 43,000 of the cuts. After three straight weeks of sequential decline in the number of global production cuts signaled that the crisis may be easing, the latest week is a setback to the perceived progress.
Automakers continue to identify methods of producing vehicles despite the lack of semiconductor chips and other materials. For example, GM recently announced it will no longer offer heated seats, a popular option among consumers, as well as other features in many of its crossovers and full-size pickups. GM is exploring whether in can retrofit vehicles with the eliminated features, but the priority is on continued production and delivery of inventory despite the shortage in chips. While eliminating vehicle features is not preferred by consumers or automakers, it is a strategy that has been implemented industrywide to limit the effects of idled production lines.
Industry Update
Automotive inventory increased by 44,000 units in October, resulting in approximately 1 million total inventory units for the month. This translates to a days’ supply (DS) which is 65% below the five-year average at 20 DS. October is the first month with an absolute increase in inventory since January 2021, an encouraging sign that the production trough may have passed. The increase in inventory was also not a result of poor sales as the 13.0 million seasonally adjusted annualized rate (SAAR) of sales in October marked the first month of sequential improvement since April 2021.
Despite the positive developments, production stoppages due to the semiconductor shortage and supply chain disruptions are expected to continue into next year. IHS Markit expects stabilization of the supply environment to occur in the second half of 2022 with inventory recovery and restocking beginning in 2023. Until stabilization, sales performance will likely be governed by production, which will remain volatile with low visibility. However, further inventory depletion is unlikely, and the constrained environment may lead to more robust demand in 2023 and beyond.
Industry Focus – Flexible Cost Structure
This month’s Industry Focus section is a summary of a larger report prepared by A&M available here.
Historically speaking, the automotive industry has been a sector categorized by its predictability worldwide. The pandemic, supply chain issues, and material shortages brought extenuating circumstances to automotive OEMs and suppliers, causing once accurate production forecasts to be viewed as a luxury in the present day. In addition to the global issues creating volatility, there is an industry transformation which encompasses powertrain electrification, connectivity, shared mobility, and autonomous driving.
To navigate the challenges of such a disruptive environment, A&M is providing further insight into how cost flexibility allows for industry players to deal with moderate volume fluctuations without disproportionate, lasting effects on profitability.
A&M has identified four key factors altering the industry and enhancing the value of cost flexibility.
To navigate the identified factors above, it is critical to incorporate certain cost flexibility levers.Suppliers are usually not properly positioned to predict or influence the volatility of production forecasts. To avoid significantly decreasing margins and profitability, suppliers and OEMs must identify and implement the appropriate counter measures for their needs. Please see the table below for insight into certain measures that can be implemented into the underlying cost structure for enhanced flexibility.
Transaction Activity
In the past month, Rivian and Volvo both completed initial public offerings that raised significant cash for the automakers. Rivian’s November 10 IPO on the Nasdaq exchange raised approximately $12 billion in cash for the electric truck startup and the stock price soared by nearly 30 percent in the first day of trading. However, Rivian remains a long way from profitability despite the high valuation, as vehicles are still being sold at a loss and the company has $8 billion in planned capital expenditures through 2023. Volvo’s IPO on the Stockholm exchange raised approximately $2.3 billion as the automaker transitions to an electric vehicle lineup. Volvo aims to use the raised funds to add production capacity and to nearly double sales to 1.2 million vehicles by 2025.
See below for additional detail on recently announced transactions.
- Daimler Mobility and Visa are forming a global technology partnership to offer in-car payments by authorizing purchases with a fingerprint. Beginning in spring 2022, Mercedes-Benz customers in Germany and the UK will be able to make purchases through the vehicle as in-car commerce becomes an increasingly important aspect of the luxury customer experience.
- Industrial chemical company DuPont announced plans to purchase engineering materials maker Rogers Corporation for approximately $5.2 billion with the goal expanding further into the electric vehicle and automotive technology markets. To fund the acquisition, DuPont is expected to sell its Mobility and Materials unit, which makes polymers and resins for vehicles.
- Lear announced it will acquire Kongsberg Automotive’s comfort seating unit for approximately $202 million. The deal is expected to close in the first quarter of 2022 and will grow Lear’s product offerings to include a larger suite of comfort seating solutions that improve vehicle performance and packaging.
- Semiconductor company Ambarella announced it will acquire Oculii, an Ohio-based startup which makes radar software that is used in advanced driver-assistance systems and autonomous driving. Ambarella will buy Oculii for approximately $307.5 million and the deal is expected to close by the end of January 2022.
Regulatory Landscape
2040 Climate Pledge for Automakers: A group ofautomakers and other companies, countries and cities have committed to phasing out gas-powered vehicles by 2040 by agreeing to the Glasgow Declaration on Zero Emission Cars and Vans. Volvo, Ford, GM, Mercedes, and Jaguar Land Rover are notable signings of the commitment, but many top automakers refrained from agreeing to the pledge due to the challenges of shifting to zero emissions. China, Germany, and the U.S. also did not join the pledge which has raised questions about the effectiveness of the agreement.
U.S. Infrastructure Package: President Biden signed an infrastructure package into place which will deliver $550 billion of new spending, including $7.5 billion for electric vehicle charging and $65 billion to upgrade the electric grid. However, the separate $1.75 trillion Build Back Better Act, which includes a tax credit for union-built electric vehicles, still has not been passed by Congress.
Ford Vaccine Mandate: Ford will require most of its salaried employees in the U.S. to receive the COVID vaccination by December 8, the same deadline set by President Biden for federal contractors to become vaccinated.
U.S. Traffic Deaths: According to the Transportation Department, traffic deaths in the U.S. soared in the first half of 2021 to over 20,000 deaths, an 18.4 percent increase from the same period in 2020. While some year-over-year increase may have been expected due to the 2020 lockdowns, this is the highest figure for the period since 2006.
Stay connected to industry financial indicators and check back in December for the latest Auto Industry Spotlight.