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DETROIT – BMW has stopped production at two German plants. Mercedes is slowing down work at its assembly plants. Warning against production stoppages, Volkswagen is seeking alternative sources for spare parts.
For more than a year, the global auto industry has been grappling with a catastrophic shortage of computer chips and other vital parts that has slashed production, slowed deliveries, and led to new and used car prices soaring beyond the reach of millions of consumers.
Now, a new factor – Russia’s war against Ukraine – has removed yet another obstacle. Critical electrical wiring made in Ukraine suddenly became inaccessible. Vehicle prices are expected to rise further next year, as buyer demand is high, supplies are scarce, and war is causing new disruptions.
The war’s damage to the automobile industry first appeared in Europe. But if Russia’s exports of metals, from palladium for catalytic converters to nickel for electric vehicle batteries, are cut, US production will likely suffer eventually as well.
“You just have to miss one piece to not be able to make a car,” said Mark Wakefield, co-head of the global automotive unit at consulting firm Alix Partners. “Any bump in the road is either a production disruption or a massively unplanned cost increase.”
Supply problems have plagued automakers since the pandemic broke out two years ago, occasionally closing factories and causing vehicle shortages. The strong recovery that followed the recession caused auto demand to greatly outpace supply – a mismatch that caused prices of new and used cars to skyrocket far beyond overall hyperinflation.
According to Edmunds.com, the average price of a new vehicle in the United States increased 13% last year to $45,596. Average used prices have increased even more: as of February, they were up 29% to $29,646.
Before the war, S&P Global had estimated that global automakers would produce 84 million vehicles this year and 91 million next year. (For comparison, they built 94 million in 2018.) It now estimates that there will be less than 82 million in 2022 and less than 88 million next year.
Mark Fulthorpe, executive director of S&P, is among analysts who think availability of new vehicles in North America and Europe will remain quite tight and prices high through 2023. the car market will intensify the demand for used cars and this will keep prices high – illegal for many households.
As a result, high economy-wide inflation for food, gas, rent and other necessities will likely leave many casual buyers unable to afford a new or used vehicle. Demand will then decrease. And so, in the end, there will be prices.
“Until inflationary pressures really start to erode consumer and business capabilities,” Fulthorpe said, “probably that will mean those who tend to buy a new vehicle will be prepared to pay top dollar.”
One of the factors behind the darkening outlook for production is the closure of automobile factories in Russia. Last week, French automaker Renault, one of the last automakers to resume production in Russia, said it would suspend production in Moscow.
The transformation of Ukraine into an embattled war zone also took its toll. Wells Fargo estimates that between 10% and 15% of the major wiring harnesses that drive vehicle production in the wider European Union are made in Ukraine. Over the past decade, automakers and parts companies have invested in Ukrainian factories to limit costs and gain proximity to European factories.
Cable shortages slowed factories in Germany, Poland, the Czech Republic and elsewhere, causing S&P to lower its worldwide auto production forecast by 2.6 million vehicles for both this year and next year. Famines could reduce exports of German vehicles to the US and elsewhere.
Harnesses are bundles of wires and connectors that are unique to each model; they cannot be easily re-supplied to another parts manufacturer. Despite the war, harness manufacturers such as Aptiv and Leoni managed to occasionally reopen factories in Western Ukraine. Still, Aptiv’s financial director, Joseph Massaro, acknowledged that Ukraine is “not open to any normal business activity”.
Dublin-based Aptiv is trying to shift production to Poland, Romania, Serbia and possibly Morocco. But the process will take up to six weeks, during which time some automakers will run out of parts.
“In the long run,” Massaro told analysts, “we will have to evaluate if and when it makes sense to go back to Ukraine.”
BMW is trying to coordinate with its Ukrainian suppliers and is creating a wider network for parts. So are Mercedes and Volkswagen.
However, finding alternative materials can be close to impossible. Most parts factories are operating close to capacity, so new workspace will need to be built. Companies will need months to hire more people and add shifts.
“The training process to accelerate a new workforce – it’s not something that happens overnight,” Fulthorpe said.
Fulthorpe said he envisions further tightening of supplies from both Ukraine and Russia. Ukraine is the world’s largest exporter of neon, a gas used in lasers that etch circuits into computer chips. Most chip manufacturers have a six-month supply; late in the year, they may fall short. This would have exacerbated the chip shortage, which had delayed production before the war more than automakers had anticipated.
Likewise, Russia is an important supplier of raw materials such as platinum and palladium used in pollution-reducing catalytic converters. Russia also produces 10% of the world’s nickel, a key component of electric vehicle batteries.
The mineral supply from Russia has not yet been closed. Recycling can help alleviate shortages. Other countries can increase production. And some manufacturers stockpiled the metals.
But Russia is also a major producer of aluminum and a source of pig iron used in steelmaking. Alix Partners says that about 70% of US pig iron imports come from Russia and Ukraine, so steelmakers will have to switch to production from Brazil or use alternative materials. Meanwhile, steel prices have skyrocketed from $900 per ton a few weeks ago to $1,500 now.
So far, the ceasefire negotiations in Ukraine have gone nowhere and the fighting continues in full force. A new wave of viruses in China could also reduce parts supply. Industry analysts say they have no clear idea when parts, raw materials and auto production will resume normally.
Even if an agreement is negotiated to suspend the conflict, sanctions on Russian exports will not change until a final agreement is reached. Even then, supplies will not start flowing normally. Fulthorpe said there will be “more hangovers due to disruption to pervasive supply chains.”
Wakefield also noted that due to the high demand for vehicles worldwide, it will take a long time to produce enough vehicles even if automakers return to full production.
When will the world be able to produce enough cars and trucks to meet demand and keep prices low?
Wakefield doesn’t claim to know.
“We are in a (production) constrained environment, in an environment where prices are rising,” he said. “It’s a strange thing for the auto industry.”
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Chan reported from London.
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