International Automotive Components Group is just one of many automotive suppliers talking with its customers after bearing the brunt of supply-chain disruptions and cost pressures that have battered the industry since the start of the coronavirus pandemic.
“The dam is kind of breaking where there are a lot of Tier 1 suppliers that just could no longer absorb these high costs anymore and wait for the next program to reprice,” said Kelly Bysouth, chief supply chain officer for IAC Group, a Tier 1 supplier of interior systems and components. “There’s some really difficult conversations with the customers … and in a lot of cases, they’re having to come to the table and help alleviate some of these costs within the Tier 1 supplier base.”
IAC Group “certainly” is talking to its customers about the pressures of higher costs tied to raw materials, freight, labor and energy, Bysouth said: “It’s fair to say that all of the Tier 1 suppliers are talking to their OEM customers about what is going on and trying to figure out appropriate solutions going forward.”
After enjoying strong profits through much of the pandemic despite a nagging semiconductor shortage and other headwinds, automakers are starting to see hits to their bottom lines. Take, for example, Ford Motor Co.’s warning to investors last month that the impacts of supply constraints and an additional $1 billion in inflation-related payments to suppliers would show up in third-quarter financial results.
In an earnings preview released Sept. 19, Ford projected adjusted earnings before interest and taxes for the third quarter to be in the range of $1.4 billion and $1.7 billion — down sharply from the same period last year and from the second quarter, and well below Wall Street analysts’ consensus. And the Dearborn automaker said it could have as many as 45,000 vehicles assembled but awaiting parts in inventory to end the quarter due to supply issues. The news came as a surprise to some investors and equity analysts, and sent the company’s stock spiraling.
What’s happening, according to experts, is that supply-chain problems are easing, but they’re still ongoing. Automotive suppliers are facing higher costs that they’re no longer able to absorb without looking to their customers for relief. Add in natural disasters, record-high shipping costs, Russia’s war in Ukraine, the ongoing pandemic and a softening economy, and experts say we’re still a long way from a normal auto market.
Delays in supply recovery and rising interest rates led Cox Automotive analysts last week to again lower their new vehicle sales forecast for 2022 to 13.7 million from the 14.4 million they projected in June. They originally had anticipated sales of 16 million this year.
Experts say the supply-chain challenges that hit the automotive industry hard near the start of 2021 are getting better — but they’re still there. A global shortage of semiconductor chips has been one of the most significant disruptions for manufacturers.
Since January 2021, the semiconductor shortage has impacted global production volumes to the tune of nearly 14 million vehicles, according to industry forecaster AutoForecast Solutions. So far this year, nearly 3.4 million vehicles have been removed from production plans due to the chip shortage and other supply constraints, according to AFS.
“Suppliers are reporting better access to semiconductors, however, the industry is far from ‘back to normal,'” said Sam Fiorani, vice president of global vehicle forecasting for AFS, in a statement. “This year’s losses pale in comparison to 2021 and 2023 is expected to be even better. Manufacturers continue to report parked product that cannot be sold and plants that are slowed or stopped due to a lack of chips and other parts.”
The consensus seems to point to the most significant chip-related bottlenecks resolving sometime next year or early in 2024, Fiorani told The Detroit News. But chips are just one part of the story.
“The supply constraints are hitting the industry across the board in almost every country,” he said. “And if investors didn’t think that Ford was being hit by it, then they’re being a bit naive. Ford is one of the largest car companies in the world and the bulk of their focus is North America. The North American supply chain is being slowed by many different parts.”
Indeed, Ford’s supply issues go beyond chips — and to the heart of its legendary brand: The Wall Street Journal reported that the automaker has delayed some deliveries because it is having trouble procuring its signature blue oval badges.
Still, insufficient capacity of semiconductors continues to be the biggest challenge, said Dan Hearsch, managing director in consulting firm AlixPartners LLP’s automotive and industrial practice. And buyers will overorder chips or order the same material from a few different sources. That’s pushed buyers to a “gray market” through third-party brokers.
There’s a 20% increase in capacity coming for the legacy microchips that the auto industry relies upon, but because of how long its takes to build fabrication facilities, most of that won’t be available until 2024, Hearsch said.
Meanwhile, despite having to park 95,000 vehicles with missing components in June, General Motors Co. is expected to beat out all of its competitors in third-quarter sales. But the Detroit automaker’s results still will be behind what it sold in the second quarter, according to Cox.
GM executives have said they’ve made progress on unloading the thousands of vehicles to dealers and expect to get them all out the door before the end of the year. Gerald Johnson, GM’s executive vice president of global manufacturing, at a plant visit late last month told the media the company is manufacturing more vehicles than it expected to in this supply constrained industry “but not as many as we want.”
“The supply chain is challenging,” he said. “We have seen improvement but it continues to be a challenge and we continue to work with our supply base to assure and build resiliency in our supply chain.”
Maxime Picat, Stellantis NV’s chief purchasing and supply chain officer, this week during a presentation at Bank of America’s Autos and Future Car Conference highlighted the daily war room around supplier escalation, working with brokers to find chips and adapting production. Long term, he emphasized closer relationships with chip makers that include direct contracts, standardizing chips that would make finding alternatives easier and aligning production with automotive trends.
Product and supply challenges also continue to hold up reveals. Stellantis’ Dodge brand recently said the final special-edition of its “Last Call” commemorative Charger and Challenger gas-powered lineup — the one Dodge CEO Tim Kuniskis said would make history — would be rescheduled once those issues are resolved. The vehicle previously had been set to make its debut in early November at the Specialty Equipment Market Association Show in Las Vegas.
Stellantis is working with Foxconn Technology Group to design chips to be installed in vehicles starting in 2024 that will be able to perform more functions and align with the needs of the consumer electronic industry whose more advanced chips represent 95% of the industry. Stellantis spokesman Fernão Silveira confirmed on Friday that the companies are finalizing a 50-50 joint venture around the efforts to design chips for Stellantis and third-party customers. It will be their second JV after the companies last year formed Mobile Drive, a company developing smart cockpits.
And in another sign of lingering supply-chain disruptions, Toyota Motor Corp. on Friday lowered its October production forecast by 6.3% because of the semiconductor shortage, Reuters reported.
Raw material prices have fallen from their peak, but it can take six months to a year for that to be felt through the supply chain based on contracts and specials, said Hearsch, managing director in consulting firm AlixPartners LLP’s automotive and industrial practice. Previously, it was suppliers bearing that burden.
“Now is the time the OEMs are getting squeezed,” Hearsch said. “Their ability to maintain high prices is starting to go away. The accordion that was crushing the Tier 1s is at the doorstep of the OEMs. We’re talking about resins, aluminum, pretty much you name it. It’s all the raw materials going in it.”
That doesn’t mean suppliers are clear, yet, depending on how upstream they are in the supply chain. They might be seeing their costs increase and, if auto plants stop production, that impacts their revenue. Meanwhile, they’re seeing interest rates increase even as they must invest in their operations, particularly in the shift to EVs. Hearsch expects to see some suppliers face “financial trouble and a liquidity crisis.”
Meanwhile, the lag in bringing additional semiconductor capacity onboard means that the light inventory levels at dealerships and resulting high prices are unlikely to abate until late 2024 or even 2025.
“If you really want a car, order it and wait,” Hearsch said. “We’re starting to see average prices, particularly used prices, start to come down. Consumers are having to option for lower-cost vehicles because of high interest rates. They’re choosing less popular vehicles out of necessity, not out of a want.”
Cox analysts, meanwhile, see signs that the pent-up demand that has held up amid low vehicle inventories is beginning to falter.
“We had to adjust our thinking throughout the course of the year as the negative supply chain effects of COVID and the Ukraine war did not subside,” Cox Senior Economist Charlie Chesbrough said during a call for Cox’s third-quarter forecast last week. “With the economic outlook worsening quickly over recent months, it now seems likely that much of the pent-up demand from limited supply is quickly disappearing as high-interest rates eat away at vehicle buyers’ ability and willingness to purchase.”
Sales are still “brisk” for Jim Walen, owner of Hyundai and Chrysler, Dodge, Jeep and Ram dealerships in Seattle, but he’s prepared for a slowdown with interest rates now double what they were at the first of the year.
“There’s gonna be a rate that’s just gonna be too high,” he said. “Cars they’re not discounting at all, they’re not making those any cheaper.”
The average monthly loan payment on a new vehicle was more than $725 in July with the average interest rate at nearly 6%, according to Cox.
“Somebody who was looking at the $600 payment is looking at the $800 payment now,” he said. “There’s a point where they become unaffordable.” But “we’ve had such a backlog of customers and backlog of cars that this is still really good.”
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