Manufacturing plant shutdowns and semiconductor shortages have resurged, continuing to obstruct the industry. Automotive inventory and sales both saw slight increases in June, despite inventories being at historically low levels and vehicle demand beginning to show signs of slowing down.
In this issue, A&M examines inflation’s effect on original equipment makers (OEMs), suppliers, consumers, and several different price increases within the automotive industry as the selected topic for the July Industry Focus.
In transaction news, Porsche is planning to IPO with an estimated valuation of $95 billion. Additionally, M&A activity continues to have a battery-centric focus, as automakers and suppliers position themselves for the electric vehicle (EV) era.
In regulatory news, U.S. states could be required to set targets for their own fuel standards under a new proposal from the U.S. Transportation Department.
Additional July insights are included below.
Financial Performance
Auto Forecast Solutions’ (AFS) latest numbers show that shutdowns and delays have resulted in approximately 2.7 million lost vehicles globally during calendar year 2022. In the past month, North American and European production have been strongly impacted by ongoing chip shortages, with both regions accounting for most new vehicle cuts. Major semiconductor makers have considered a plan for a European chip facility, due to the fact that European factories have already lost more than 1 million vehicles year to date. The latest AFS estimates suggest approximately 3.6 million total cars and trucks will be affected by chip-related disruptions in 2022.
As the automotive industry continues its transition into the electric era, the competitive landscape for OEMs and suppliers is also shifting. EVs and autonomous technologies are producing more data in the industry than ever before, creating an opportunity for a new type of supplier with cloud computing companies such as Google, Microsoft, and Amazon. In recent months, Google announced the launch of two solutions designed to aid in the management and processing of information for customers to gain powerful insights into their manufacturing and supply chains. Ford and ZF Friedrichshafen are among the first in the industry to utilize these cloud-based analytic platforms, with Google and Microsoft Azure respectively. In an industry that continues to be hit by disruptions, cloud computing companies have the ability to provide enhanced connectivity, increased efficiency, and an alternative method for improving financial performance.
Industry Update
Automotive inventory increased by 90,000 units in June, resulting in approximately 1.22 million total units. This translates to a days’ supply (DS) that is 43 percent below the five-year average at 28 DS. June total inventory levels marked another month of constricted supply, with inventories remaining at historically low levels when compared to the norm, historically ranging from 2.5 million to 3 million units. The overall supply of vehicles remains a primary issue for the industry, but vehicle demand has begun to slow as extensive levels of inflation, rising interest rates, and consumer fears of an economic recession have come to the forefront.
New light vehicle sales in the U.S. declined 17 percent year-over-year in June with a 13 million seasonally adjusted annualized rate (SAAR) of sales, which was lower than analyst expectations. The moderate increase in inventory did not fully turn over in sales, with approximately 90,000 additional units yielding an increase of only 20,000 units in sales. While sales increased slightly from May, the mid-year mark continues the trend of recessionary level SAARs. As a result of consistently weaker production, a recovery likely won’t occur until the mid-2020s.
Industry Focus – Inflation and Price Increases
While automakers and suppliers continue to be hampered by enduring economic conditions across the world, inflation has surfaced as a new disruptor for the automotive industry. In this month’s industry focus section, A&M analyzes the effects of inflation on OEMs, suppliers, and their respective customers.
Inflation and the Effect on OEMs and Suppliers
On a global scale, inflation has been rampant and surging across different countries. In the U.S., May and June have marked consecutive months of record setting consumer inflation levels, at 8.6 percent and 9.1 percent respectively, when compared to the past four decades. A month-over-month 11.2 percent rise in gas prices significantly drove the increase in the consumer-price index (CPI) for June. Furthermore, the new-vehicle affordability index reached record highs, as published by Cox Automotive and Moody’s. The index observes economic conditions to yield the number of weeks of income that are necessary for consumers to purchase a new light vehicle and their monthly payments, which both worsened in June to 42.2 weeks of income and $730. The recent measures of inflation are a negative side effect from COVID-19 and strong overall economic growth, partially fueled by historically low interest rates and additional stimulus income used in pandemic recovery efforts. Several other imbalances, such as the persisting supply chain struggles, have also contributed to the high degree of inflation.
Historically, some OEMs and suppliers have established contractual relationships to purchase raw materials through the utilization of indexing and resale programs to diminish price volatility risk. For those that do not have these purchasing circumstances, inflation has promoted substantial cost increases. Although these relationships are unique to each OEM and supplier, rising operational costs to assemble vehicles and their respective parts have surged for the automotive industry due to inflation. The Producer Price Indexes (PPI) for both motor vehicles and vehicle parts manufacturing, as well as the PPI for automotive parts and accessories have all increased to their highest amounts since the early 2000s. The PPI measures the rate of change in selling prices received by domestic producers, which are a sign of upward price pressures when greater. Additionally, the June CPI has shown energy price increases of almost 50 percent since January of 2021. As a result of these escalated costs for OEMs and suppliers, margins and profitability are eroding with limited solutions.
Price Increases
Since the onset of COVID, a number of price increases ranging from gas to car insurance have affected consumers. On its own, gasoline experienced the highest levels of inflation when analyzing the past year with three fuel types (regular, mid-grade, and premium gas) averaging a 38.6 percent boost in price, subsequently making EVs and hybrid vehicles more attractive. Even though EVs eliminate the need to use fuels directly, the purchase price and insurance costs saw growth of 8.8 percent and 4.8 percent, respectively.
Driven by shortages in key materials and component parts, logistical delays, production issues and the interdependent nature of the global economy, many costs for automakers and their suppliers are likely to remain inflated until supply constraints, commodity prices, energy prices, and other markets stabilize.
Despite the increasing levels of inflation and PPI index, some pricing for commodities and key automotive raw materials have begun to lower in the current year. While this may be a sign of easing inflation levels, many raw material prices are still substantially higher when compared to pre-pandemic figures. Therefore, OEMs and suppliers are still having to cope with considerably elevated raw material prices and significantly higher operational costs.
Key raw materials that are commonly used by OEMs and suppliers are detailed below to display pre-COVID and current data, as well as the respective changes in price.
The prices for new and used vehicles have also risen. According to the Bureau of Labor Statistics (BLS), the CPI for new and used vehicles in the U.S. soared by 17.2 percent and 52.9 percent, respectively, which is significantly higher than overall inflation of motor vehicle parts. Thus, automakers have been able to offset higher manufacturing input costs and increase profitability through higher vehicle prices, while suppliers generally have absorbed much of the impacts from inflation in raw material and other input costs.
To see A&M’s prior coverage of key raw materials relating to EVs and hybrid vehicles, please clickherefor the April Automotive Spotlight. Additionally, clickherefor A&M’s reporting of raw material prices from last year’s September Automotive Spotlight.
Transaction Activity
In recent transaction news, EV and battery makers remain active in strategic growth initiatives, as Walmart struck a deal with Canoo to further electrify its fleet with a potential for 10,000 battery-powered vans for order deliveries. Additionally, battery recycler Redwood Partners has landed partnerships with Volkswagen and Toyota to reuse key materials and limit mining for precious metals used in EV batteries. Lastly, Porsche and Northvolt are moving forward with plans to go public via IPO at later dates, receiving valuation estimates of $95 billion and $12 billion, respectively. Porsche also stated plans for their battery unit business to go public via IPO within the next two years.
See below for additional detail on recently announced transactions.
- Ford Motor Company has finalized the formation of a joint venture with SK On Co., a South Korean battery manufacturer and its subsidiary. The JV, BlueOval SK LLC, has plans to establish three EV facilities in the U.S., with approximately $6.6 billion in contributions from Ford. The venture will accelerate battery development and improve EV performance for Ford
- Vietnamese auto manufacturer, VinFast, has landed a partnership with solid-state battery technology start-up, ProLogium, in addition to tens-of-millions in investments. The automaker aims to launch multiple EVs in the U.S. during 2022, with a target for delivering solid-state batteries in 2024.
- Valeo has acquired Siemens 50 percent stake in the previous Valeo-Siemens joint venture, eAutomotive, for $288 million. The auto supplier plans to fully integrate the electric motors venture into its powertrain systems business. The acquisition will strengthen Valeo’s competitive position in electrification and create major synergies by 2025.
- EV charging station developer, Blink, has struck an agreement to acquire SemaConnect Inc. for $200 million. The acquisition adds 13,000 chargers, 3,800 locations, and makes Blink the only U.S.-based EV charging infrastructure company strategically oriented to design, manufacture, and develop all aspects of the EV charging network.
Regulatory Landscape
Mercedes Legal Dispute: Mercedes-Benz is currently involved in a German class-action lawsuit after the country’s largest consumer protection group raised accusations of manipulated diesel-emissions tests. The investigation will aim to rule if Mercedes knowingly and deceitfully lowered pollutant levels produced by the GLK and GLC crossover vehicle models.
NHTSA Proposals and Requirements: The National Highway Traffic Safety Administration (NHTSA) has rejected a proposal from 2019 that would have allowed OEMs to equip hybrids and EVs with several compliant sounds. The rejection is purposed for quieter vehicles to have alerts for pedestrians, cyclists, and the visually impaired to limit crashes or other injuries. Additionally, the NHTSA has proposed requirements for vehicles to collect 20 seconds of pre-crash data, increasing from the current standard of five seconds. The additional data will be integral in understanding the causes of crashes, especially as it relates to EV and other autonomous technologies.
U.S. States to Set Fuel Standards: The U.S. Transportation Department has recently announced a proposal that would call for state transportation agencies to set their own targets for reducing tailpipe emissions. The rule is stated to be flexible, with the ability to reach net-zero goals in 2050 by setting targets that work for each state and their respective policies, such as climate change. The newly proposed rule would also require states to report progress and any changes necessary to reach their respective targets.
Porsche Fuel Economy Claims: Porsche, and its parent VW, have come to agreement on the class-action lawsuit accusing the auto manufacturer of intentionally altering tests relating to emissions and fuel economy data. The settlement is worth at least $80 million and affects approximately 500,000 Porsche vehicles.
Stay connected to industry financial indicators and check back in August for the latest Auto Industry Spotlight.