For more than a year, the global automotive industry has struggled with a catastrophic shortage of computer chips and other vital parts that have shrunk production, slowed supplies and sent prices of new and used cars skyrocketing, out of reach of millions of consumers.
Now a new factor – Russia’s war against Ukraine – has thrown up another obstacle. Critically important electrical wires, made in Ukraine, are suddenly out of reach. With high demand from buyers, scarce materials and the war causing new disruptions, car prices are expected to go even higher well into next year.
The war damage to the car industry first appeared in Europe. But US production is also likely to suffer in the end if Russian exports of metals – from palladium to catalysts to nickel to batteries for electric vehicles – are disrupted.
“You only have to miss one part to not be able to make a car,” said Mark Wakefield, co-head of consulting firm Alix Partners’ global car unit. “Any bump in the road will be either an interruption of production or a very unplanned cost increase.”
Supply problems have confused automakers since the pandemic broke out two years ago, sometimes closing factories and causing a shortage of vehicles. The robust recovery that followed the recession caused the demand for cars to surpass supply significantly – a mismatch that caused the prices of new and used vehicles to rise far beyond the general high inflation.
In the United States, the average price of a new vehicle has risen 13% in the past year to $ 45,596, according to Edmunds.com. Average used prices have risen much more: They have risen 29% to $ 29,646 in February.
Before the war, S&P Global Mobility had predicted that global automakers would build 84 million vehicles this year and 91 million next year. (By comparison, they built 94 million in 2018.) Now it expects less than 82 million in 2022 and 88 million next year.
Mark Fulthorpe, CEO of S&P, is among analysts who believe that the availability of new vehicles in North America and Europe will remain very tight – and prices high – well into 2023. To exacerbate the problem, buyers who are Priced out of the new vehicle market will intensify the demand for used cars and also keep these prices elevated – unaffordable for many households.
Eventually, high inflation across the economy – for food, petrol, rent and other necessities – is likely to leave a large number of ordinary buyers out of control of a new or used vehicle. Demand would then decline. And so would the prices in the end.
“Until inflationary pressures really start to erode the capacity of consumers and businesses,” Fulthorpe said, “it will likely mean that those who want to buy a new vehicle will be willing to pay the highest dollar.”
One factor behind the weak outlook for production is closed by car factories in Russia. Last week, French carmaker Renault, one of the last carmakers to continue building in Russia, said it would stop production in Moscow.
The transformation of Ukraine into a combat war zone has also hurt. Wells Fargo estimates that 10% to 15% of the major power lines supplying car production in the wider EU were manufactured in Ukraine. In the last decade, car manufacturers and spare parts companies have invested in Ukrainian factories to reduce costs and gain proximity to European factories.
The shortage of wires has slowed down factories in Germany, Poland, the Czech Republic and elsewhere, prompting S&P to reduce its forecast for worldwide car production by 2.6 million vehicles for both this year and next. The shortage could reduce the export of German vehicles to the United States and elsewhere.
Wiring harnesses are bundles of wires and connectors that are unique to each model; they can not easily resources to another spare parts manufacturer. Despite the war, harness manufacturers such as Aptiv and Leoni have succeeded in reopening factories sporadically in western Ukraine. Nevertheless, Joseph Massaro, Aptiv’s CFO, acknowledged that Ukraine “is not open to any normal commercial activity.”
Aptiv, based in Dublin, is trying to move production to Poland, Romania, Serbia and possibly Morocco. But the process will take up to six weeks, leaving some car manufacturers short of parts during that time.
“In the long run,” Massaro told analysts, “we will have to assess whether and when it makes sense to return to Ukraine.”
BMW is trying to coordinate with its Ukrainian suppliers and is throwing a wider grid for parts. The same is true of Mercedes and Volkswagen.
Still, it can be almost impossible to find alternative supplies. Most parts factories work close to capacity, so a new workspace must be built. Businesses would need months to hire more people and add work shifts.
“The training process to accelerate a new workforce – it’s not one thing from one day to the next,” Fulthorpe said.
Fulthorpe said he foresees a further tightening of the supply of materials from both Ukraine and Russia. Ukraine is the world’s largest exporter of neon, a gas used in lasers that etch circuits on computer chips. Most chip manufacturers have a six-month supply; at the end of the year they could fall short. It would exacerbate the chip shortage, which before the war had delayed production even more than carmakers had expected.
Likewise, Russia is a key supplier of such raw materials as platinum and palladium used in pollution-reducing catalysts. Russia also produces 10% of the world’s nickel, an important ingredient in EV batteries.
Mineral supplies from Russia have not yet been shut down. Recycling can help alleviate the shortage. Other countries may increase production. And some manufacturers have stored the metals.
But Russia is also a major aluminum producer and a source of pig iron used to make steel. Nearly 70% of US pig iron imports come from Russia and Ukraine, says Alix Partners, so steelmakers will have to switch to production from Brazil or use alternative materials. Meanwhile, steel prices have risen from $ 900 per barrel. tons a few weeks ago to $ 1,500 now.
So far, negotiations on a ceasefire in Ukraine have not progressed anywhere and the fighting has raged on. A new virus rise in China could also cut back on spare parts. Industry analysts say they have no clear idea when parts, raw materials and car production will flow normally.
Even if an agreement is negotiated to suspend the fighting, sanctions against Russian exports would remain intact until a final agreement was reached. Even then, supplies would not start flowing normally. Fulthorpe said there would be “additional hangovers due to disruptions that will occur in the widespread supply chains.”
Wakefield also noted that due to an intense accumulated demand for vehicles worldwide, even if automakers restore full production, the process of building enough vehicles will be lengthy.
When can the world produce an abundant supply of cars and trucks to meet demand and keep prices down?
Wakefield pretends not to know.
“We are in an environment of rising prices, a (production) limited environment,” he said. “It’s a strange thing for the automotive industry.”
Chan reported from London.