Lagging effects // Supply chain disruption ‘benefits no one’

October 2021 - U.S. sales in August of light vehicles “continued to feel the inventory pinch,” according to Chris Hopson, manager for North American light vehicle forecasts at IHS Markit, a Boston-based consultancy. A total unadjusted sales volume level of 1.1 million units for August is the lowest monthly total since January 2021.

“Inventory constraints are expected to limit any upside potential to U.S. auto demand levels through the rest of 2021, with little recovery expected even in the first half of 2022,” Hopson predicts.

“U.S. light vehicle sales are constrained by inventory more than any time in recent memory, and the situation is likely to continue to be difficult,” says Stephanie Brinley, principal automotive analyst at the firm.

“The scenario of low inventory and high demand sees consumers facing higher prices and reduced choice, while automakers see volumes decline. There is some automaker benefit in the higher pricing but, as the situation drags on, this may not be enough to truly offset the opportunity lost from reduced inventory. In short, the current situation benefits no one,” she says.

Another consultancy, Deloitte, went into a deep-dive analysis of the major pinch point from the global supply chain to the assembly line: semiconductors.

Deloitte analysts Debanjan Dutt, Chris Richard and Aref Khwaja say the semiconductor shortage “hit the automotive sector right at the point when it was trying to mount a sustained recovery from the COVID-19 pandemic. A shortage of wafer and substrate production capacity forced many OEMs to shutter production facilities around the world.”

The global unit volume loss attributed to the pandemic during the first quarter of 2021 is more than 1.3 million vehicles, according to an IHS Market estimate, and another 1 million vehicles were expected to go unbuilt during Q2.

The COVID-19 pandemic had a “swift and severe impact” on the globally integrated automotive industry. As a result, manufacturers drastically reduced their forecast projections to suppliers. Months later, as OEMs restarted operations, sales rebounded in the second half of 2020, with growth fed by pent-up consumer demand. The strength of the rebound in demand caught the industry largely by surprise, and the need for semiconductors returned.

In response to the assembly plant shutdowns in early 2020, Tier III and IV semiconductor wafer and substrate manufacturers shifted their production to higher demand sectors such as consumer electronics. Restarting the automotive supply channel remains hampered by the reality of semiconductor manufacturing lead times, which can be three to six months for advanced chips.

There is also a knock-on effect of one to two months to restart electronic module production at the Tier I and II supplier level. In a highly specialized, capital-intensive industry, the limited number of players with semiconductor manufacturing expertise will likely keep supply constrained.

At the heart of this crisis is a lack of visibility up and down the value chain that prevented OEMs from identifying potential risks associated with their decision to shutter vehicle assembly operations in spring 2020, Deloitte surmises.

“Traditionally, it’s very difficult to create a line of sight through an entire automotive supply chain for a variety of reasons, including a lack of trust and communication between stakeholders, reliance on poor volume forecasts and outmoded data management systems. The result is an unknown number of potentially disastrous threat vectors that remain buried until it’s too late to avoid them,” Deloitte’s analysts write.

Black swan events highlight the need for multi-tier supply chain visibility as OEMs look to integrate their networks globally. Automotive OEMs’ visibility is primarily limited to their Tier I suppliers. Beyond that, there is often “surprisingly little information” shared in terms of who suppliers are in upstream tiers, what components they make and how their operational parameters could potentially destabilize the entire network.

This lack of visibility prevents the OEMs from uncovering structural bottlenecks that exist at sub-levels of supply, the analysts say.

The impact of the semiconductor crisis is expected to last at least through the end of 2021, given the long lead times and constrained supply that is intrinsic to each tier. OEMs  responded by shifting assembly to more in-demand products, bypassing the installation of some components until a later date, and securing alternate sources of semiconductor supply.

One automaker Deloitte interviewed avoided the worst of the crisis by setting up contracts to source and stockpile two to six months of chips on its behalf. While this appears to run counter to the JIT paradigm, this strategy insulated the carmaker against the initial disruption.

Photo: Ford Motor Co.