Supply-chain issues drive inflation in the auto industry
Just-in-time manufacturing saved money until the pandemic shut down global manufacturing efforts.
Few industries have felt the supply-chain-induced inflation more than the auto industry, and many analysts are warning that relief may still be months, if not more than a year away.
Automakers pioneered just-in-time inventories decades ago. When they work, those systems drive down costs and optimize resources across the supply chain.
But when factories shut down across the globe during the pandemic, that tightly coordinated system also shut down. Now, as demand returns to full speed, automakers and their intricate web of suppliers are straining to keep pace.
The result is record-low inventories on new car lots. Just drive by one and notice how the vehicles are spaced out to mask how thin those lots really are. And with fewer new vehicles hitting the market, the demand for used vehicles is also near record highs, pushing the prices up on both.
Chips
The poster child of the auto supply chain woes is the microprocessors that drive nearly every advanced component on a vehicle — and these days, that is most of them.
Chip supplies were thin before the pandemic, but the shortage is beyond the crisis point after the global shutdown.
On the plus side, some sectors of the industry say they have fewer chip shortages, but they are still likely to be a problem for at least another year.
Beyond the shock to the just-in-time inventories, chips are also in demand by more than just automakers. Economy-wide competition for semiconductors has increased, with not only phones and computers demanding processors, but also things like smart refrigerators and other new smart devices on the market, not to mention the demand from cryptocurrency miners.
In light of the shortage, many manufacturers are now overordering, but that could mean if everyone is ordering more than they need, there could be an imbalanced supply chain for a long time while it all smooths out.
For their part, chip makers are working to ramp supply back up, and there are even some high-profile plans to expand some plants and build new ones closer to the U.S. market.
But backlogs take time to work out, and new plants take years to come online, so it will likely be some time before capacity is back to the on-demand supply of just a few years ago.
Spare parts
Cost increases for the auto industry aren’t limited to just microprocessors. According to the St. Louis Federal Reserve, automotive parts as a whole saw a 17% cost increase over the past year.
With global turmoil and lingering pandemic shutdowns, not to mention raw material costs, nearly everything that goes into making a new vehicle costs more. One dramatic example is in the wiring harness.
Wiring harnesses are normally a low-cost component that rarely gets a second thought. However, they are used throughout the vehicle, and many were made in Ukraine.
Following the Russian invasion, those humble, yet critical components are much more difficult to come by, causing automakers to scramble and find alternatives.
And the problem goes deeper. Ukraine was also the supplier of about a quarter of the world’s neon gas, a critical input to many of the advanced components in modern vehicles. In addition, other essential raw materials primarily came out of Russia, many of which are now under international sanctions.
Electric vehicles (EVs) aren’t spared the supply chain woes either. Critical battery components, such as lithium, nickel, cobalt and graphite, are in short supply globally now that most automakers have made pledges to pivot to EVs, which is causing shortages and price spikes there, too.
And inflation, in general, is also driving up prices, with wages in the manufacturing sector increasing at an annualized rate of 18% during the first three months of the year.
Finding solutions
In the short run, many automakers turned to so-called selective manufacturing in response to the supply chain issues. That means they shifted their focus to making only their highest-margin vehicles, ensuring they still were able to maintain their return on investment.
But it means that the supply shortage is now being felt unevenly throughout the market, with different areas being squeezed more than others.
In the long term, many automakers have opted to take control of more aspects of their supply chain, such as Tesla, which purchased a graphite processing plant to ensure their supply.
As pandemic shutdown-induced shortages wane, automakers will begin to see relief from their long-time suppliers. But many have taken this shock as an opportunity to re-imagine what their supply chain, and their business models, should look like moving forward.
Michael Giusti, (michael.giusti@att.net), is an analyst and senior writer for InsuranceQuotes.com.
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