Cars are now much smarter and more technological than perhaps the manufacturers themselves would like. A single headlight can have about 20 chips, twice as many as an entire vehicle had 20 years ago. Today, a car can incorporate more than 1,000 semiconductors, which in the midst of a global shortage of these tiny components is a constant headache for the automotive industry. But he’s not the only one.
After covid-19, new ‘unfortunate events’ have been added to the list. Early last year, a winter storm in Texas affected the gas supply to plants in North America, causing shortages of resins and plastics. A month later, in March, a container ship stuck in the Suez Canal disrupted shipping traffic for weeks; while the fire at the Renesas Electronics chip plant in Japan aggravated the shortage of semiconductors for Japanese assemblers, which until then had managed to cope better with the problem than the industry in Europe and the United States.
The imbalances in the chain continued during 2021 and have worsened in 2022. New confinements in China, after the arrival of the omicron variant, intensified the shortage of electronic components; while the Russian invasion of Ukraine paralyzed production in Europe. In March this year, an earthquake and tsunami threat in Japan forced some assemblers to close plants for a couple of weeks. All these events have unleashed a chaos that manufacturers have had to learn to manage.
“This looks like an obstacle course, because you jump over one and another comes up ahead. This is already our new condition”, says Magda López, CEO of Renault in Mexico. Miguel Barbeyto, president of Mazda in Mexico, has a similar feeling. “I can’t say it’s been easy. But you have to keep a cool head.”
The Japanese brand today has an average of five months of waiting for practically all its models, while for its small CX-3 crossover it is 10 months. Spare parts are also scarce in the warehouses of Mazda workshops. “There are months when we even struggle a lot with the filters that we bring from Japan, due to interruptions in the supply chain. Such a basic piece, there are times when there isn’t one”, says Barbeyto.
2022 was supposed to be the year of recovery. At this point, the plants must have been working flat out to meet all that contained demand for vehicles accumulated during the months of confinement. Issues like chip shortages, massive covid-19 lockdowns, lack of containers, and port bottlenecks would be a thing of the past. Anecdotes that would be told in boardrooms.
But not only is recovery far away, but the year has even been pointed out by the leaders of the automakers as “more challenging” than the previous ones. “We all hoped that this 2022 would be a bonanza, but we are seeing that it is the other way around, it will be more difficult than 2020 and 2021,” says Barbeyto.
Sell cars that do not arrive
Model shortages have limited the ability of auto and component makers to return to pre-pandemic sales volumes. “There really is a higher demand than what we are offering. We were ‘stored’ in our homes for two years and there is a contained demand that needs to be met. If we had more vehicles, we would sell much more”, says López, from Renault.
Waiting lists loom large at dealership desks. “It’s a happy problem : we have a lot of demand, but the units come to us in dribs and drabs,” says Eugenia Benavides, Brand Manager for Ford’s SUV and New Products in Mexico. Inventories have practically disappeared from the sales floors and the units that arrive are delivered to customers who have been waiting for several months. “Just as the chips arrive, this is how the models are produced and that is how they are delivered to the target market,” says Benavides.
For manufacturers like Renault, the biggest obstacle now is not the chips, but the lack of containers and ships to transport units arriving from Brazil, Argentina, Colombia, South Korea and France to the ports of Lázaro Cárdenas and Veracruz. “We have benefited from the fact that the configuration of the vehicles that are manufactured in Latin America has been able to better overcome the shortage of chips. But what is now driving the industry is the logistics issue. There are not enough shipping fleets and dozens of vehicles are waiting in the yards,” says López.
Even in port, the distribution of the models to dealers has faced obstacles. Some assemblers had problems in 2021, first due to railway blockages and then due to a sinkhole, to enter the vehicles that arrived in Lázaro Cárdenas from Asia.
As manufacturers juggle keeping all the balls in the air – the ones that are already there and the new ones that are falling to them – new production and sales forecasts are continually emerging. S&P Global Mobility forecasts that the war in Ukraine will reduce global production through 2024. The auto research firm, formerly known as IHS Markit, in March lowered its global light-vehicle production forecast for 2022 by 2.6 million units, to 81.6 million. . In 2019 the production was 92 million. By 2023, the expectation is 88.5 million.
The conflict in Eastern Europe
Volkswagen, BMW and Mercedes-Benz have been among the hardest-hit automakers since the Russian invasion of Ukraine began in late February. The German government is heavily dependent on Russian energy and raw materials, but due to the situation in Eastern Europe, German automakers are facing critical supply shortages from several local suppliers.
About 45% of the wiring harnesses built in Ukraine were exported to Germany and Poland, as were various electronic components. The manufacturer of harnesses, circuits and electronic cards Jabil has two plants in Ukraine and 60% of the production goes to factories in Europe, especially Volkswagen, BMW and Audi. Although the two complexes are still in operation, they were experiencing delivery delays because several suppliers in neighboring cities have been affected by the conflict. “Inevitably, European-manufactured cars are going to be affected,” says Víctor Manuel Morales, director of Operations and Regional Development for Jabil’s operation.
The Volkswagen Group is one of them. Although the company reported that its operating profit for the first quarter increased compared to the same period in 2021, “the impact of the war in Ukraine, the current covid pandemic and the shortage of semiconductors caused a double-digit decrease in unit sales” of its Volkswagen, Seat and Skoda volume brands, the automaker said in its quarterly report. And Mexico is no stranger to all these movements.
“Volkswagen is a global brand and as such we are not immune to the environment. And, indeed, these variables, which are beyond us, impact the business and the way it develops”, says Edgar Estrada, director of Volkswagen. The brand closed 2021 as the third best-selling, but at the end of the first quarter it was in fifth position in sales, below Toyota and Kia. In April, he rose to the fourth seat.
After South Africa, Russia is the second largest supplier of palladium, which is needed for gasoline engine catalysts. It is also the third largest producer of nickel ore, which is used in the production of lithium-ion batteries. Ukraine, for its part, is one of the most important suppliers of neon gas, necessary to manufacture semiconductors, and the lack of this input will further lengthen the shortage of chips.
“Neon gas is used in plants in Europe to assemble Transit,” says Benavides. An update of the van was launched at the end of 2021 in the Mexican market, as well as an electric version.
The cost of operating without certainties
Nearly two years into the global shortage of semiconductors, automakers remain unsure when supplies will stabilize. “There is no clear forecast on the chips; We don’t know how many are going to touch the automotive industry”, comments Benavides.
There is also no clarity on when the container shortage will end. “This delay in inventories is generalized for all industries. I think it will take us a few more months,” adds López.
The situation has forced companies to look for alternatives. “This pandemic has prompted us to do different things, to have a more efficient business model, based on data analysis,” says the Jabil manager. The company now has an advanced planning team with analytical and statistical tools that constantly monitors market behavior and demand.
It also designed very flexible production lines and diversified its means of transportation. “We contract air cargo in advance, without knowing if we will have the product or not. We do a lot of negotiating with logistics providers. We place the demand in advance: what I did three months before, now I have to do five before to enter that line.
But all these adjustments have raised operating costs. Jabil, for example, used to pay $2,500 to transport a container full of harnesses from China to Manzanillo, and now pays $9,800. And if before it cost around 1.50 to 2.50 dollars per kilo of air cargo, now it is 5.7 dollars.
These cost overruns of between 300 and 400% have made the components and, consequently, the cars more expensive. “These costs have been partly absorbed by the industry and partly passed on to the end user. A car that cost 200,000 pesos right now does not drop below 300,000 pesos,” Morales points out.
At this point in the year, manufacturers are cautious when talking about their expectations for the end of 2022. “We live from day to day,” says Morales. “That is already our new condition. I talk to the team and tell them that it is no longer worth putting the energy into trying to understand what is happening, but rather looking for how to overcome these obstacles and move on”, concludes López.