While the semiconductor shortage was long considered the excuse par excellence for why the automotive sector couldn’t produce enough vehicles during the pandemic, some manufacturers have begun pivoting to blaming supply chains that have been stymied by Chinese lockdowns. Toyota is probably the best-known example. But the matter is hardly limited to a singular automaker and market analysts have already been sounding the alarm bell that strict COVID-19 restrictions in Asia will effectively guarantee prolonged industrial hardship around the globe.
Back in April, Shenzhen was emerging from a month-long lockdown. However, the resulting downtime severely diminished the tech hub’s output which exacerbated global component shortages. While Chinese state-run media claimed regional factories maintained full-scale production during the period, the reality was quite a bit different. Meanwhile, Shanghai has remained under harsh restrictions since March and more look to be on the horizon. As an important industrial center and the world’s busiest port by far, the situation has created an intense backlog of container ships that are presumed to create some of the sustained problems that we’re about to explore.
It was estimated that over a fifth of the world’s containerships were effectively stuck by the start of May, creating a situation so dire that the CEO of Vespucci Maritime stated that it would be impossible to measure the full impact of the situation for months even if China decided to end all restrictions overnight. However, President Xi Jinping has tasked local leadership with overseeing a “zero-COVID policy” that has basically allowed officials to act in whatever manner they see fit to ensure not a single new case emerges. Unfortunately, the policy has been unsuccessful and has since begun to collide with subsequent government efforts to restore Chinese productivity.
This is the reason you’ve seen so many reports about factory workers being forced to sleep on concrete floors. Local ordinances require residents to isolate themselves from the general populace, forcing many employees to make the decision between weeks of staying home as food deliveries become increasingly unreliable or going into work with the knowledge that they will be prohibited from leaving. Overzealous local officials want to appease mandates issued by their superiors, line workers want to earn enough money to eat, and Confucian Chinese culture encourages everyone to adhere to a fairly rigid social structure without making a fuss.
While the ramifications of this vastly exceed the automotive sector, the industry has taken a massive hit. Chinese vehicle sales cratered in April, showing a nearly 50 percent decline against the prior year. For the global market, this means strained supply chains for the foreseeable future. While not all manufacturers are being impacted equally in terms of component shortages, the situation in China has encouraged global shipping bottlenecks that no company can escape completely.
Though, to be fair, most developed nations based their pandemic response on what they saw China doing at the start of 2020. The World Health Organization (WHO) even endorsed its tactics as the gold standard — setting the state for the supply problems and economic fallout that analyses are now attributing to those decisions. Going back even further, the trade war that erupted between the United States and China during the Trump administration is likely to have also played a meaningful role in terms of raising the price of material goods. Long story short, the issue has been snowballing for years and simply went into overdrive during the pandemic.
This is what has encouraged some automakers to approve the “closed-loop system” that has employees sleeping on factory floors. May companies lost out on weeks of production adhering to local health mandates and/or due to an inability to source parts. Tesla was confronting both and eventually decided to embrace live-in employees. According to Bloomberg, Volkswagen has also opted to keep Chinese workers locked inside factories until mid-June — creating more fallout for one of several multinational companies (including General Motors) that have previously been accused of benefiting from forced labor stemming from the Uyghur ethnic minority located in Western China.
Though the optics haven’t really been good for anyone, as even the best-case scenario involves repeat production pauses and diminished output. Electric-vehicle manufacturers have had it particularly bad in this regard. Shortages of nickel, manganese, and lithium appeared in 2021 and have been wreaking havoc on automakers building all-electric cars. Some Chinese automakers were even accused of leveraging government restrictions as a continent excuse to suspend production despite not being located in regions where lockdowns were taking place (e.g. NIO). But component shortages have also become rampant across the industry and are hardly limited to EV companies. For example, many nations are currently confronting steel shortages due to the Russo-Ukrainian War and shipping issues stemming from China. Fuel shortages have likewise become a serious problem, driving up the cost of transporting materials that were already under heavy inflationary pressure.
Currently, the industry is trying to contend with the above by tweaking supply chains and trying to source more raw materials domestically. Though the latter item should have been obvious, as material shortages (especially those linked to EVs) were being forecast as far back as 2016. Car companies are now having to make inroads with mining concerns, chip manufacturers, software companies, and battery producers — or integrate those elements into their own business model in a way that maximizes survivability without going bankrupt in the process.
Bill Russo, the founder and CEO of Automobility, has repeatedly speculated that vertical integration will become the rule for most large companies (not just automakers) in the coming years. But this runs the risk of creating corporate monopolies the likes of which the world hasn’t seen before. Historically, consumers living under monopolistic structures are left with perpetually high prices and a lack of competition that typically nullifies any prospect of real innovation (i.e. better cars). There have even been calls that numerous developed nations (including the United States) already have a serious problem with monopolies that have been amplified during the pandemic. The counterpoint to this is that there may be no other way to contend with these problems in the short term and many Western governments seem to be encouraging the tactic by subsidizing industrial growth within their respective borders. However, Russo told Forbes that he saw few alternatives for automotive production. Like many working in the auto industry, he believes manufacturers will need to become their own suppliers if they’re to remain competitive — especially in the realm of electric vehicles.
“There’s no choice,” he said. “Otherwise, you’re going to be wholly dependent on battery makers like CATL, Panasonic or BYD as your tier one supplier, and they will sell their capacities to the highest bidder. And that’s what’s happening right now.”
“More vertical integration,” he continued. “Take a play from the Apple playbook with Apple Silicon chips. That was a move to vertically integrate and control more of the sophistication and differentiation of the user experience. The auto industry must do something similar. However, traditional carmakers have historically sourced commodity chips to drive down cost. A lot of the reason why they got into the problem they have today is they have relied on commodity-chip suppliers. A lot of those chips are built off with mature technology — four- or five-inch wafer technology. They don’t even make the (chip-making) equipment for that now. If you want to scale up and that supply gets taken by a consumer electronics customer — which was what happened during COVID, they can’t scale up. The solution will eventually be to source customized integrated circuits where you have the ability to control the buy and sell these components. Batteries and chips supply are the key battlegrounds for securing your position in the future of this industry.”
But saying this is wholly the fault of Chinese lockdowns, the trade war, bad government, poor industrial leadership, generalized greed, the blind push into electrification, or even the conflict in Ukraine would be disingenuous. Our present situation is a slurry of the above married to corporate interests that either see the present situation as a live-or-die moment or an opportunity to swell the business. We also don’t know if the planned solutions listed above will ultimately end up being the ones that work. Much of the forecasting that’s being done today suggests that the automotive market will continue struggling with high prices and reduced inventories. But one wonders what the actual tolerance for that will be. Consumers may simply check out and make do with what they have until prices stabilize, rather than overpaying indefinitely under the assumption things may never return to normal. There’s a chance we’ve already seen those trends emerging, as record dealer profits coincided with a 14-percent decline in new U.S. vehicle sales for Q1 of 2022.
[Image: Volkswagen Group]
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