The automotive sector is going from pothole to pothole. First, at the worst stage of the pandemic, widespread factory closures caused parts shortages for the automotive sector. Then, in 2021, consumption recovered, putting supply in difficulties, since it had not recovered the production rate. Subsequently, the geopolitical conflict between Ukraine and Russia was added, which further pressured inflation, unleashed by the increase in demand. And, as icing on the cake, with the rise in prices, central banks have raised their rates, which can cause a global economic recession.
All this situation has put pressure on the actions of the automakers, which last week suffered a setback after Ford sank more than 12%, its worst drop in a decade, this drop occurred mainly because the manufacturer indicated that the costs related to inflation would rise $1 billion more than expected this quarter and parts shortages will delay deliveries to the end of the year.
“Supply shortages will result in a larger number of vehicles being built but remaining in Ford inventory awaiting needed parts at the end of the third quarter. The company believes those vehicles, an anticipated 40,000 to 45,000 units, mostly high-margin trucks and SUVs, will be completed and sold to dealers during the fourth quarter,” Ford said in its Sept. 19 statement.
Ana Sepúlveda, client portfolio manager of Fintual México mentioned that Ford’s statement had a negative impact on the sector since the negative impacts on inflation were visible and the issue of shortage of semiconductors made investors pay more attention to automakers, because added to the possible economic recession, the demand could be affected significantly.
A complex year for the industry
Although the shares of the automotive sector most affected in 2022 have been those of Ford, with 42.3%, the entire industry lives, and suffers, the same situation: so far this year, General Motors shares fall 40.2% ; those of Volkswagen, 22.1%; they are followed by Tesla, with 21.6%; BMW, with 18.5%; Stellantis, with 16%; Hyundai, with 12.4%; Nissan, with 10.6% and Toyota, with 5.7%.
In a different way, Japanese automakers such as Honda, Mitsubishi and Mazda presented increases of 3.8%, 13.9% and 26%, respectively.
“When you see that the situation is difficult, you begin to cut certain expenses that are not mandatory and among them is the change of a car. So it has been a difficult 2022 for the sector, because if they could recover from the semiconductor problem, a very complex 2023 will most likely come in terms of economic adjustments,” added Sepúlveda.
In case you want to invest in these actions, the Fintual analyst recommended seeing how defensive each action is according to its level of debt, how much they keep in cash and what strategies they have going forward to face a recession, such as their coverage for raw materials. Those that have this type of strategies could be a long-term investment alternative since the valuations are attractive.
“Delivery times for automotive microcontrollers that grabbed everyone’s attention a year ago have improved slightly since February. However, lead times for analog chips remain consistently high at nearly four times the long-term average, near peak levels in the context of the current semiconductor shortage. We believe that analog supply will continue to cause difficulties within the automotive supply chain,” Phil Amsrud, senior principal analyst at S&P Global Mobility, said in an analysis.
The future for supply chains
The dismantling of supply chains, in the wake of the pandemic, revealed the importance of their resilience, which translates into their ability to continue operating even when affected by a shock. Recently, the wave of the omicron variant and the war in Ukraine added uncertainty about the production capacity of the sector.
Diego A. Cerdeiro and Niels-Jakob H. Hansen, economists in the Asia and Pacific Department and the Research Department of the International Monetary Fund (IMF), noted that as a result of this disarticulation, policymakers and companies are already discussing several options to remodel them.
Among those options, there are those who call for relocation (disconnecting from global supply chains by bringing foreign production back to the country of origin). The second proposal is that some advocate greater diversification (increasing the number of foreign suppliers of a given input, even if it implies higher costs), this would have a coverage limit, since unless all supplying countries are affected at the same time, producers would be better able to withstand a supply shock. Finally, companies that decide to carry excess inventory would better weather a temporary supply shock.
One of the drawbacks that IMF economists find to the first option is that the search for self-sufficiency or reinstalling production in a single country would result in less efficiency, since it is proven that this situation does not improve resilience. This strategy would be similar to putting all the eggs of the supply chain in one basket, which would imply a fairly high risk of not obtaining all the necessary inputs.
The other diversification and excess storage options are basically hedging strategies, since countries and companies must decide how much they want to pay for an insurance premium concept.