It looks like 2022 is another bump in the road for global automakers as lockdowns, chip shortages, inflation, rising interest rates, the war in Ukraine and anti-globalization sentiments have combined to dampen automakers’ forecasts for the year. But now, nearly halfway through 2022, what about 2023?
Not quite halfway through and it looks like 2022 isn’t going to be the year global automakers hoped it would be. There was lingering optimism from 2021, when vehicle sales in the US nearly cracked 15 million, up over the pandemic plagued 2020, – The Lost Year for the Auto Industry – which included factory shutdowns and diminished demand. (See AJOT July 27, 2020). The tally was still short of the over 17 million units sold in the years leading up to the pandemic and production was still having problems ramping up with supply chain disruptions and the emerging microchip shortage.
But there were reasons to be optimistic. April of 2021 was one of the best months for auto sales since the Great Recession with over 1.53 million units sold or an annualized clip of over 18 million units according to Cox Automotive figures. Other figures also buoyed the outlook. Global vehicle production had made a comeback. According to statistics by the OIDA (Organization of Motor Vehicle Manufacturers) global automakers produced 77.171 million vehicles in COVID-19 2020 year and rebounded to 80.15 million units in 2021. There was also the widespread feeling among analysts that consumers “pent up demand” for vehicles coupled with “normal” manufacturing would boost auto sales in 2022.
2022 Bumps in the Road
Early on there was reasonable doubt whether 2022 would or could really be the year for a return to “normal” for the global auto market. Take the comments by Wallenius Wilhelmsen COO Mike Hynekamp’s on the “Market Dynamics” made in January 2022, “Car makers experiencing continued part shortages. This causes a continued production capacity constraint…. disruption remains a fact for finished vehicle logistics.” And Hynekamp’s remarks carry weight, as Wallenius Wilhelmsen is the world’s largest RO/RO operator with 130 vessels, amounting to about a 20% market share, and in FY 2021 carried 13.8 million vehicles.
The “disruptions” already have forecasters revising their prognostications for vehicle production and sales. For example, in an article on Automotive Research & Analysis, S&P Mark Fulthorpe wrote of the April forecast, “Currently the greatest risk to the outlook comes from the threat of further or prolonged lockdowns in mainland China and the contagion into the already stressed supply chains.”
In the revised auto production estimates for April, S&P Global Mobility moved auto production downward for Europe (-2.9%), China (-1.6%), North America (0.1%) and the rest of the world (-0.1%) for a global total of (-1.1%).
Interestingly, North America was the only region to show any upward movement. According to S&P Mobility, production in Q1 was actually higher than the 3.55 million unit forecast but Q2 was revised down on supply chain concerns and issues at the border crossing between Texas and Mexico.
Jeff Schuster, president, Americas operations and global vehicle forecasts for LMC Automotive, wrote in the JD Power U.S. Automotive Forecast for March 2022, “Risk in the outlook for the global economy and vehicle sales has increased significantly since last month [February]. The compound of extending existing disruptions from supply shortages and the war in Ukraine has created a volatile market, causing to make a substantial downgrade to 2022 outlook.”
As an example of the slide in forecasts, Japanese automaker Toyota dropped its U.S. light vehicle forecast down from 16.5 million units to 15.5 million units or about 20% decrease for 2022. (See global auto production chart on page 40 for a more detailed view.)
Ironically, while auto production is down, demand is still firm and retail auto prices at near all time highs. Average transaction prices are expected to reach a March record of $43,737, a 17.4% increase from a year ago. JD Power in their March report noted, “For Q1 2022, average transaction prices are expected to reach $44,129, an 18.0% increase from Q1 2021.”
And even with the high sticker prices the autos are moving off the lots virtually at arrival. As Thomas King, president of the data and analytics division at J.D. Power, explained in the report, “Vehicles continue to sell quickly, and most of those vehicles have been ordered or purchased by buyers before they arrived at the dealership. This month [March], a record 56% of vehicles will be sold within 10-days of arriving at a dealership, while the average number of days a new vehicle is in a dealer’s possession before being sold is on pace to be 18-days down from 54-days a year ago.” And inventory is down as a result. U.S. new vehicle inventory was estimated at 1.11 million units at the end of March. The tally represents about a 35 day supply, and this is down 54% compared to the same period last year.
Chips and Dips
With demand so strong and retail prices for autos high, why is the projected production and delivery of autos now falling? The microchip shortage is one obvious answer. Shifts at auto plants around the world have been cut because of a lack of chips. A typical example of the impact of the chip shortage was in a March report from Volvo. The Swedish carmaker in late March cancelled shifts at its Torslanda plant near Gothenburg. The plant produces XC90 and XC60 SUVs and the V90 station wagon. Because of the shortage of microchips critical to the production of these models, Volvo suspended shifts to build up enough chip inventory to restart the assembly lines. Other automakers have adopted other strategies. For example, GM reportedly delivered the autos to the dealers without some chips installed. The idea being that the dealers could later have the consumers bring the vehicles back and get the chips installed at a later time for nonessential items like heated steering wheels or charging pads.
Every OEM (Original Equipment Manufacturer) has had to devise a strategy to ensure the supply chain resilience during periods of stress. And Toyota’s approach to the supply chain has been widely touted as the go-to model for automakers. Events like the 2011 monsoon floods in Malaysia and Thailand, along with the Japan’s Great Tohoku Earthquake and tsunami crippled Japan’s auto manufacturing and prompted re-think of the auto supply chain. From the crucible of the 2011 events Toyota developed a new production strategy called TPS or Toyota Production System. A key feature of the strategy was the multiple sourcing of parts – like microchips – to create supply chain redundancy. TPS uses three different sources with the primary supplier making up two-thirds the total to ensure economies of scale. Additionally, Toyota implemented a program of small lot with high frequency delivery to keep the production lines flowing. To make this demanding system function, Toyota developed a well-tuned system for tracking inventory throughout the supply chain. The system enabled Toyota to predict part shortages and get ahead of sourcing problems.
When the microchip shortage hit, Toyota was able to shift production and initially was less impacted by the shortage than other automakers. Still, even with the best planning, as one industry expert noted, the chip shortage even caught up with Toyota. And at that stage, the automaker had to make choices on which vehicles to manufacture and which not to, according to chip availability.
Supply Chain Whiplash
The ongoing COVID lockdowns in South China and other supply chain disruptions, like the chip shortage, have contributed to a whiplash effect on auto deliveries. As with containerships, there is a shortage of capacity and port delays for RO/RO vessels. This coupled with sporadic surges in demand for RO/RO capacity have whiplashed the auto supply chain. To handle the surging demand, it is rumored that some Asian carriers are looking into delivering straight to the West Coast and railing the autos to their East Coast destinations rather than going direct via the Panama Canal. The concept being that getting the ships back for reload in Asia is of paramount importance to a smooth running supply chain and the bottom-line for automaker, carriers, and dealers.
Whether this plays out is a question mark, as neither the port accessibility nor rail services or even trucking availability are guaranteed to underwrite a faster supply chain. Further, with the high demand for ships. and high price of newbuilds in Asia, adding more RO/ROs will be costly and time consuming.
For the vehicle processors, the companies that receive and handle the finishing of a vehicle, adjusting to the surges in auto demand are a challenge.
Ben Buben, chief operating officer (COO) of Amports, a Jacksonville, Florida-based vehicle processor with ten port facilities and an inland operation, coping with the “new normal” of auto supply chain is nuanced.
As Buben explains, “The flow of deliveries to the port has been uneven. AMPORTS locations will see an influx of traffic and a lull waiting for the next vessel to arrive. The chip shortage has made the volumes less predictable, which puts added pressure on the industry to expedite the flow through the ports. OEM customers have added more accessorization to each unit to maximize the profits of each unit sold, which has added more labor hours we need to produce daily at each of our port locations while keeping our operations efficient.”
The flow of autos for finishing and distribution has also been complicated by changes in delivery to the vehicle processors. “Many OEMs have shifted the conveyance on how the autos arrive at our port locations. With the challenges in vessel, rail, and truck capacities. We now see OEMs using a mixture of all three to get the traffic into our locations to elevate the velocity to the end-user,” Buben added.
Many auto industry analysts are optimistic that 2023 will mark a return pre-pandemic production and sales levels. Still, as the industry bumps its way through the first half of 2022, questions remain what the “new normal” will be in 2023?