The U.S. automotive industry is a key economic indicator of health and market sustainability; its conjoined relationship with supplier industries creates a profound economic and political influence. Yet, despite these roots and associative dependency, the instability of the automotive sector is absolute. Margins trend below 5% in the best of times, and profitability by volume is low, despite huge revenues and large employment numbers
As history might suggest, cyclical transformation is imminent. To better understand what is to come, we first need to look back. Once we’ve done that, the insights provided below will be far more successful.
A Look to the Past
Material shifts in the macro-economic conditions of the automotive industry and the markets by which they’re serviced are nothing new. Take, for example, the 2008 housing crisis. Credit markets froze, forcing a destructive bottleneck in U.S. auto sales. By 2009, the automotive sector was drowning in an $80B crisis—all while continuing to suffer from overcapacity and market saturation. This financial disaster, along with years of poor fiscal discipline, a general lack of innovation, and the worst corporate performance in American history, created risk across the automotive industries. It was only with a 3.5% government contribution to the total U.S. gross domestic production (GDP) that the market could survive.
The stimulus saved jobs, created new operating standards, encouraged new financial practices, helped to define employment terms, and facilitated energy efficiency standards across the boards. The apparent lasting effect of this exchange for cash was innovation, including electric vehicles (EVs), lower fuel consumption, and smaller vehicles.
One such company that would benefit from this industry impasse was Tesla, which was close to shuttering the operation amid the 2009 auto crisis. Conveniently enough, the incoming U.S. president was keen on both a green energy economy and executing the auto bailout. These two circumstances collided, and in 2010, Tesla took a $465M federal loan to design and mass-produce electric vehicles (EVs).
Fast forward a decade, this global proliferation of EVs has transformed the auto sector while creating growth in new supplier subcommunities—such as semiconductors. Conventional vehicles require an average value of $350 of semiconductor materials, whereas hybrid and fully electric vehicles will contain significantly more—between $1000 and $3500. While a modest percentage of total cost, these auto semiconductors come in a wide variety of specialized use cases (e.g., autonomous driver tech, sophisticated entertainment centers, and simple technologies for windows and seat movement).
A New Set of Roadblocks
Demand for chips dramatically increased in the automotive industry between 2010 and 2019. However, when Covid-19 ravaged the globe in 2020, auto manufacturers expected slow sales and scaled back in their demand. As a result, chip manufacturers naturally scaled back production of “mature” chips and pivoted to producing more technologically advanced “emerging” chips to support the rise of 5G and its associated electronic devices. As the automotive sector recovered from the COVID-19 pandemic, they saw a returned increase in demand. Unfortunately, manufacturers’ switch to more progressive chips meant that the automotive industry would now face significant shortages when they needed materials most.
With mobility constraints caused by the pandemic, the global chip shortage persists. This is all in the face of accelerated demand for EVs, conventional auto, and all forms of personal computing and electronic devices. It’s important to emphasize that the impact on auto manufacturers is disproportionately high. Considering that lead times for chips have continuously increased over the last few quarters, producers must prioritize consumption by sector and revenue. Auto is low margin and low volume for semiconductor sales—less than 10% of a $542B market.
Where We Are We Now
Disruption of the auto industry in 2021 is real and palpable—with no sign of relief or improvement coming anytime soon. While some companies, such as Toyota, appear more resilient to chip shortages and other forms of market volatility, twenty manufacturing plants across North America and Europe have been shuttered and/or sit idle. Overall and globally, four million fewer vehicles will be produced this year than initially projected, and direct manufacturing companies stand to lose $110B in sales.
What to Expect Next
In the months to come, we should expect government bodies to inject stimulus funds, chip production to increase, and new fabrication plants to be constructed. These actions will mitigate the next crisis, but it will not alleviate this one, as it requires up to $20B in capital and five years to construct a new semiconductor foundry.
For those looking to maintain a competitive advantage while they weather the storm, investing in cognitive supply platforms that harmonize your view of enterprise information is key. Having the insights needed to both anticipate and quickly react to market shifts ensures enterprises have the opportunity to gather the right supply and ensure revenue attainment.
The LevaData Platform offers much-needed visibility into potential obstacles and risks by leveraging relevant external insights across multiple tiers of your supply chain. Learn more about LevaData’s revolutionary, AI-driven platform and what it will do to help your organization mitigate supply chain risks like those happening in the auto industry today.
Post by: Scott Morgan
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